Understanding the Nature of the Risks and the Source of the Rewards to Momentum Investing

Rodney L. White Center for Financial Research Working Paper Series #13-98

58 Pages Posted: 2 Jun 1998

See all articles by Bruce D. Grundy

Bruce D. Grundy

University of Melbourne

J. Spencer Martin

University of Melbourne - Faculty of Business and Economics; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: Summer 2000

Abstract

Buying recent winners and shorting recent losers guarantees time varying factor exposures in accordance with the performance of common risk factors during the ranking period. Adjusted for this dynamic risk exposure, momentum profits are remarkably stable across subperiods of the entire post 1926 era. Factor models can explain ninety-five percent of winner or loser return variability, but cannot explain their mean returns. Momentum strategies which base winner or loser status on stock-specific return components are more profitable than those based on total returns. Neither industry effects nor cross-sectional differences in expected returns are the primary cause of the momentum phenomenon.

Keywords: Factor loadings, hedging, momentum

JEL Classification: G11, G12

Suggested Citation

Grundy, Bruce D. and Martin, J. Spencer, Understanding the Nature of the Risks and the Source of the Rewards to Momentum Investing (Summer 2000). Rodney L. White Center for Financial Research Working Paper Series #13-98. Available at SSRN: https://ssrn.com/abstract=94049 or http://dx.doi.org/10.2139/ssrn.94049

Bruce D. Grundy (Contact Author)

University of Melbourne ( email )

Faculty of Economics & Commerce
Department of Finance
Victoria, 3010
Australia
+61 3 8344 9083 (Phone)
+61 3 8344 6914 (Fax)

J. Spencer Martin

University of Melbourne - Faculty of Business and Economics ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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