Price and Earnings Momentum, Transaction Costs, and an Innovative Practitioner Technique

We use an innovative practitioner technique to investigate the interplay between the ex post performance of momentum strategies and transaction costs, rebalancing frequency, turnover constraints, and fund size. We have three interrelated main results: first, the level of and correlation between acti...

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Bibliographic Details
Published inInternational review of finance Vol. 15; no. 4; pp. 555 - 597
Main Authors Tajaddini, Reza, Crack, Timothy Falcon, Roberts, Helen
Format Journal Article
LanguageEnglish
Published Oxford Blackwell Publishing Ltd 01.12.2015
Subjects
Earnings
Finance
G11
G14
G15
Investment policy
Prices
Return on investment
Studies
Transaction costs
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Summary:We use an innovative practitioner technique to investigate the interplay between the ex post performance of momentum strategies and transaction costs, rebalancing frequency, turnover constraints, and fund size. We have three interrelated main results: first, the level of and correlation between active returns to price momentum and earnings momentum strategies vary dramatically with these factors; second, strategies that are fearful of ex ante transaction costs generate returns net of transaction costs that are far superior to the net returns of naive strategies; and third, obtaining better traction with the unique elements of each strategy yields a more profitable combined strategy.
Bibliography:We thank the New Zealand Stock Exchange (NZX) for supplying analyst forecast data, NZSE 40 and NZX 50 index weights and advice about NZX data issues. We thank Scott Chaput and Mark Tippett for helpful conversations. We also thank seminar participants at Otago University; participants at the 25th Australasian Finance and Banking Conference, Sydney, Australia, December 2012; participants at the 17th annual New Zealand Finance Colloquium, Dunedin, New Zealand, February 2013; and anonymous referees. Any errors are our own.
istex:7C488817F71C04AE9952A9B00A364939716C6B01
ArticleID:IRFI12065
ark:/67375/WNG-ZZNGX40R-3
ISSN:1369-412X
1468-2443
DOI:10.1111/irfi.12065