Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics

Several recent studies document that sorting stocks first on certain stock-level characteristics and then on past returns results in elevated momentum profits. We show that such strategies enhance momentum profits simply by trading in stocks with more extreme past returns. Adjusted for this effect,...

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Published inIDEAS Working Paper Series from RePEc
Main Authors Bandarchuk, Pavel, Hilscher, Jens
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2011
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Abstract Several recent studies document that sorting stocks first on certain stock-level characteristics and then on past returns results in elevated momentum profits. We show that such strategies enhance momentum profits simply by trading in stocks with more extreme past returns. Adjusted for this effect, elevated momentum profits resulting from characteristics (size, R², turnover, age, analyst coverage, analyst forecast dispersion, market-to-book, price, illiquidity, credit rating) disappear almost entirely. Interaction patterns have been used to support behavioral and limits-to-arbitrage explanations of momentum; our findings imply that explanations of momentum should instead focus on the link between momentum profits and extreme past returns.
AbstractList Several recent studies document that sorting stocks first on certain stock-level characteristics and then on past returns results in elevated momentum profits. We show that such strategies enhance momentum profits simply by trading in stocks with more extreme past returns. Adjusted for this effect, elevated momentum profits resulting from characteristics (size, R², turnover, age, analyst coverage, analyst forecast dispersion, market-to-book, price, illiquidity, credit rating) disappear almost entirely. Interaction patterns have been used to support behavioral and limits-to-arbitrage explanations of momentum; our findings imply that explanations of momentum should instead focus on the link between momentum profits and extreme past returns.
Author Hilscher, Jens
Bandarchuk, Pavel
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