Momentum Investing
Do financial market prices reliably exhibit momentum? If so, why, and how can traders best exploit it? These blog entries relate to momentum investing/trading.
March 30, 2009 - Momentum Investing, Technical Trading
In their 2009 book, The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets, Mebane Faber and Eric Richardson “profile the top endowments and then examine how an investor can hope to replicate their returns while avoiding bear markets. The focus [is] on practical applications that an investor can implement immediately to take control of their investment portfolio.” Mebane Faber “is the portfolio manager at Cambria Investment Management where he manages equity and global tactical asset allocation portfolios” and a co-founder of AlphaClone, an investing research web site. Eric Richardson is Chairman and founder of Cambria Investment Management. The book has a complementary web site that links to source materials. The principal messages of the book are: Keep Reading
March 27, 2009 - Momentum Investing, Value Premium
The value premium and the momentum effect are arguably complementary drivers of financial asset pricing dynamics, with the latter alternatively creating and extinguishing the former. Does empirical evidence support this view across asset classes? In the February 2009 version of their paper entitled “Value and Momentum Everywhere”, Clifford Asness, Tobias Moskowitz, and Lasse Pedersen investigate the interplay of value and momentum across asset classes worldwide, as follows: (1) stocks within four major countries; (2) country equity indexes; (3) government bonds; (4) currencies; and, (5) commodities. They calculate momentum based on return over the past 12 months, excluding the most recent month, for all asset classes. They estimate value based on measures commonly used for each asset class (such as book-to-market ratio for stocks). Using price and value characteristics data for broad samples of these asset classes, they conclude that: Keep Reading
January 28, 2009 - Big Ideas, Momentum Investing, Value Premium
Do returns associated with the four famous factors (market, size, book-to-market, momentum) vary systematically with the state of the market (such as bull or bear)? In their January 2009 paper entitled “The Effect of Market Regimes on Style Allocation”, Manuel Ammann and Michael Verhofen investigate how returns for the four factors differ between market states as determined by a multivariate two-state model of the overall equity market. Using U.S. stock market and factor data spanning 1927-2004, they conclude that: Keep Reading
January 22, 2009 - Momentum Investing
Do momentum trading strategies work consistently across country markets? In his December 2008 paper entitled “Are Anomalies Still Anomalous? An Examination of Momentum Strategies in Four Financial Markets “, Daxue Wang applies various tests to measure the profitability of momentum strategies in the two largest stock markets in each of Europe (UK and Germany) and Asia (Japan and China). He tests overlapping equally weighted portfolios formed on returns over the past 3, 6, 9 or 12 months (no wait month) and held for 3, 6, 9 or 12 months. Using monthly stock price data and firm characteristics for companies comprising more than 95% of market capitalization in each country over the period 1990 (1994 for China) through 2006, he concludes that: Keep Reading
December 4, 2008 - Momentum Investing
Why are there no “momentum” exchange-traded funds (ETF)? What would it take to create them? How might they have performed in recent years? In their November 2008 paper entitled “Momentum and Contrarian Stock-Market Indices”, Jon Eggins and Robert Hill propose a new class of diversified momentum (overweighting stocks that have recently outperformed) and contrarian (underweighting these same stocks) ETFs derived from partitions of a benchmark index. Their methodology allows adjustment of the degree to which a partition is momentum or contrarian via a single parameter, with associated turnover increasing as the degree of momentumness or contrarianness increases. ETFs based on such index partitions would allow individual investors practical access to diversified momentum/contrarian strategies and provide performance benchmarks for momentum and contrarian investment managers. Using price data for the components of the Russell 1000 index over the period June 1995-June 2007 to construct baseline momentum and contrarian indexes, they conclude that: Keep Reading
September 2, 2008 - Momentum Investing, Value Premium
Do growth and value investing styles have momentum? If so, can investors/traders enhance momentum trading returns by accounting for the stylishness of stocks (the degree to which they fit into either a growth or value style)? In their August 2008 paper entitled “Style Investing, Co-movement and Return Predictability”, Sunil Wahal and Deniz Yavuz measure returns from the combination of stock momentum and stock stylishness. They consider momentum portfolio formation and holding intervals of three, six and 12 months, with an intervening skipped month. They define stock stylishness (but do not use that term) as the degree of stock price co-movement with either growth stocks or value stocks over the past three months. Using monthly returns, book-to-market ratios and market capitalizations for a broad set of stocks over the period 1965-2006, they conclude that: Keep Reading
August 7, 2008 - Commodity Futures, Momentum Investing
Does combining two commodity futures trading signals shown to be effective in prior research, momentum and roll return (term structure), improve on both? In the May 2008 version of their paper entitled “Tactical Allocation in Commodity Futures Markets: Combining Momentum and Term Structure Signals”, Ana-Maria Fuertes, Joelle Miffre and Georgios Rallis measure the combined value of momentum and roll return signals in the design of commodity futures trading strategies. They test combinations that iteratively buy backwardated (positive roll return) winners and short contangoed (negative roll return) losers. Using daily closing prices on the nearby, second nearby and distant contracts for 37 commodities as available over the period January 1979 through January 2007, they find that: Keep Reading
July 30, 2008 - Momentum Investing, Size Effect
Are momentum trading strategies reliable and economically significant after trading frictions for large-capitalization stocks? In his November 2006 paper entitled “Alpha Generating Momentum Strategies”, Gregor Obrecht test 32 momentum trading strategies on large-capitalization U.S. stocks. The strategies encompass all combinations of: formation periods of three, six, nine and 12 months; wait periods of zero months and one month; and, holding periods of three, six, nine and 12 months. Using monthly returns for S&P 100 stocks over the period 12/85-8/06, he concludes that: Keep Reading
June 27, 2008 - Momentum Investing
Industries arguably follow multi-month cycles of outperformance and underperformance. Can investors use industry/sector Exchange Traded Funds (ETF) to capture abnormal returns from industry momentum? In their June 2008 paper entitled “Can Exchange Traded Funds Be Used to Exploit Industry Momentum?”, Laurens Swinkels and Liam Tjong-A-Tjoe analyze the profitability of industry momentum strategies based on two sets of industry/sector ETFs. Using monthly ETF return data for the period July 2000 through November 2007, they conclude that: Keep Reading
May 7, 2008 - Animal Spirits, Momentum Investing
Do the attention-grabbing past returns of high-flying stocks produce pre-earnings announcement buying frenzies? In the April 2008 version of their paper entitled “Limited Attention and the Earnings Announcement Returns of Past Stock Market Winners”, David Aboody, Reuven Lehavy and Brett Trueman examine whether the limited time and resources of small investors explains a striking return pattern around the earnings releases of firms with extremely strong prior year price momentum. Using daily stock return data and earnings release/forecast news from the beginning of 1971 through the third quarter of 2005 for a broad sample of companies, they conclude that: Keep Reading