Are Momentum Profits Robust to Trading Costs?

Journal of Finance, Vol. 59, No. 3, pp. 1039-1082, June 2004

Posted: 29 Dec 2004  

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Abstract

We test whether momentum strategies remain profitable after considering market frictions induced by trading. Intraday data are used to estimate alternative measures of proportional and non-proportional (price impact) trading costs. The price impact models imply that abnormal returns to portfolio strategies decline with portfolio size. We calculate break-even fund sizes that lead to zero abnormal returns. In addition to equal- and value-weighted momentum strategies, we derive a liquidity-weighted strategy designed to reduce the cost of trades. Equal-weighted strategies perform the best before trading costs and the worst after trading costs. Liquidity-weighted and hybrid liquidity/value-weighted strategies have the largest break-even fund sizes: $5 billion or more (relative to December 1999 market capitalization) may be invested in these momentum strategies before the apparent profit opportunities vanish.

Keywords: Momentum strategies, transaction costs, price impact, optimal trading, market efficiency

JEL Classification: G11, G14

Suggested Citation

Korajczyk, Robert A. and Sadka, Ronnie, Are Momentum Profits Robust to Trading Costs?. Journal of Finance, Vol. 59, No. 3, pp. 1039-1082, June 2004. Available at SSRN: https://ssrn.com/abstract=545162

Robert A. Korajczyk (Contact Author)

Northwestern University - Kellogg School of Management ( email )

Kellogg School of Management
2211 Campus Drive, Room 4357
Evanston, IL 60208
United States
847-491-8336 (Phone)
847-491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/korajczyk_robert.aspx#research

Ronnie Sadka

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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