The Vanishing Abnormal Returns of Momentum Strategies and 'Front-Running' Momentum Strategies

66 Pages Posted: 18 Aug 2006 Last revised: 12 May 2009

See all articles by Thomas Henker

Thomas Henker

Bond University

Martin Martens

Erasmus University Rotterdam (EUR); Robeco Asset Management

Robert Huynh

UNSW Australia Business School, School of Banking and Finance

Date Written: January 1, 2006

Abstract

We find large variations in returns from momentum strategies. Momentum strategies did not earn significant returns during the period of 1993-2004 which was due to their poor performance over the period from 2001-2004. We find that the previously documented large firm momentum effect is sensitive to the momentum strategy examined, and is in our sample driven by the abnormal returns of large Nasdaq stocks. We also evaluate momentum strategies that do not adhere to the end of month portfolio formation universally used in the academic literature. To this end we form portfolios one week prior to the end of month and call them 'front-running' momentum portfolios. Consistent with institutional momentum trading affecting end of month returns and volatility, we find that 'front-running' a momentum strategy generates similar, but less volatile returns than the month-end strategy. Pertinently, the returns of a 'front-running' strategy are consistently less volatile than that of an equivalent month-end strategy.

Keywords: Momentum portfolio, front-running, abnormal return, portfolio selection

JEL Classification: G11, G10

Suggested Citation

Henker, Thomas and Martens, Martin P.E. and Huynh, Robert, The Vanishing Abnormal Returns of Momentum Strategies and 'Front-Running' Momentum Strategies (January 1, 2006). Available at SSRN: https://ssrn.com/abstract=924522 or http://dx.doi.org/10.2139/ssrn.924522

Thomas Henker (Contact Author)

Bond University ( email )

Gold Coast, QLD 4229
Australia
+61 7 5595-1561 (Phone)

Martin P.E. Martens

Erasmus University Rotterdam (EUR) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1253 (Phone)
+31 10 408 9162 (Fax)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

Robert Huynh

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

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