Feasible Momentum Strategies - Evidence from the Swiss Stock Market
University of Basel Finance Working Paper No. 10/04
50 Pages Posted: 13 Nov 2004
Date Written: December 2005
While there is little controversy on the profitability of momentum strategies, their implementation is afflicted with many difficulties. Most important, chasing momentum can generate high turnover. Though there are already several attempts to make momentum strategies less expensive with respect to transaction costs, we go a step further in the simplification of momentum strategies. By restricting our sample to Switzerland's largest blue-chip stocks and choosing only one winner and one loser stock, we find average returns to our momentum arbitrage portfolios of up to 44% p.a. depending on the formation and holding periods. While unconditional risk models are at odds with momentum profits, stock market predictability and time-varying expected returns explain a large part of the momentum payoffs, including the post-holding period behavior of the winner and loser stocks (overreaction and subsequent price correction). We also report interesting patterns of a number of stock characteristics over the (pre-)formation and (post-)holding periods.
Keywords: Momentum strategies, Large-caps, Event study analysis, Stock market predictability, Under- and overreaction
JEL Classification: G11, G12
Suggested Citation: Suggested Citation