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The Profitability of Momentum Investing

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  • Weimin Lui

    (University of Exeter,)

  • Norman Strong
  • Xinzhong Xu

Abstract

We test for the presence of momentum profits in the UK over the period 1977 to 1998. The analysis shows that significant momentum profits are present in both a comprehensive sample of UK stocks and an accounting sub-sample. An analysis of sub-period results, seasonal effects, and the persistence of momentum profits confirms the robustness of the results. Controlling for factors known to be associated with differences in average returns, such as size, stock price, book-to-market ratio, and cash earnings-to-price ratio, cannot explain momentum profits. We also confirm that serial correlation in common factors and delayed price reaction to common factor realisations cannot explain momentum profits. We conclude that the momentum effect derives from market underreaction to either industry- or firm-specific information and it is a significant, independent phenomenon in UK stock returns. Copyright Blackwell Publishers Ltd 1999.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

Volume (Year): 26 (1999-11)
Issue (Month): 9-10 ()
Pages: 1043-1091

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Handle: RePEc:bla:jbfnac:v:26:y:1999-11:i:9-10:p:1043-1091

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Momentum Redux
    by quantivity in Quantivity on 2011-06-19 04:14:45
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Cited by:
  1. Morelli, David, 2014. "Momentum profits and conditional time-varying systematic risk," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 29(C), pages 242-255.
  2. Li, Xiafei & Miffre, Joëlle & Brooks, Chris & O'Sullivan, Niall, 2008. "Momentum profits and time-varying unsystematic risk," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 541-558, April.
  3. Chelley-Steeley, Patricia & Siganos, Antonios, 2008. "Momentum profits in alternative stock market structures," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 18(2), pages 131-144, April.
  4. Jonathan Fletcher & David Forbes, 2002. "U.K. Unit Trust Performance: Does it Matter Which Benchmark or Measure is Used?," Journal of Financial Services Research, Springer, Springer, vol. 21(3), pages 195-218, June.
  5. Ian Tonks & Mark T Hon, 2002. "Mommentum in the UK Stock Market," FMG Discussion Papers, Financial Markets Group dp405, Financial Markets Group.
  6. Fletcher, Jonathan & Hillier, Joe, 2002. "On the usefulness of linear factor models in predicting expected returns in mean-variance analysis," International Review of Financial Analysis, Elsevier, vol. 11(4), pages 449-466.
  7. Roscoe, Philip & Howorth, Carole, 2009. "Identification through technical analysis: A study of charting and UK non-professional investors," Accounting, Organizations and Society, Elsevier, vol. 34(2), pages 206-221, February.
  8. Glaser, Markus & Weber, Martin, 2002. "Momentum and Turnover: Evidence from the German Stock Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3353, C.E.P.R. Discussion Papers.
  9. McInish, Thomas H. & Ding, David K. & Pyun, Chong Soo & Wongchoti, Udomsak, 2008. "Short-horizon contrarian and momentum strategies in Asian markets: An integrated analysis," International Review of Financial Analysis, Elsevier, vol. 17(2), pages 312-329.
  10. Chou, Pin-Huang & Wei, K.C. John & Chung, Huimin, 2007. "Sources of contrarian profits in the Japanese stock market," Journal of Empirical Finance, Elsevier, Elsevier, vol. 14(3), pages 261-286, June.
  11. Ising, Jan & Schiereck, Dirk & Simpson, Marc W. & Thomas, Thomas W., 2006. "Stock returns following large 1-month declines and jumps: Evidence of overoptimism in the German market," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 46(4), pages 598-619, September.
  12. Keith Lam & Frank Li & Simon So, 2010. "On the validity of the augmented Fama and French’s (1993) model: evidence from the Hong Kong stock market," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 35(1), pages 89-111, July.
  13. Artmann, Sabine & Finter, Philipp & Kempf, Alexander, 2010. "Determinants of expected stock returns: Large sample evidence from the German market," CFR Working Papers 10-01, University of Cologne, Centre for Financial Research (CFR).
  14. Patricia Fraser & Martin Hoesli & Lynn Mc Alevey, . "House Prices and Bubbles in New Zealand," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 06-20, Swiss Finance Institute.
  15. Badreddine, Sina & Galariotis, Emilios C. & Holmes, Phil, 2012. "The relevance of information and trading costs in explaining momentum profits: Evidence from optioned and non-optioned stocks," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 22(3), pages 589-608.
  16. Bettman, Jenni L. & Maher, Thomas R.B. & Sault, Stephen J., 2009. "Momentum profits in the Australian equity market: A matched firm approach," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 17(5), pages 565-579, November.
  17. Ye, Qing & Turner, John D., 2014. "The cross-section of stock returns in an early stock market," QUCEH Working Paper Series 14-05, Queen's University Centre for Economic History, Queen's University Belfast.
  18. Lasfer, M. Ameziane & Melnik, Arie & Thomas, Dylan C., 2003. "Short-term reaction of stock markets in stressful circumstances," Journal of Banking & Finance, Elsevier, vol. 27(10), pages 1959-1977, October.
  19. Xiafei Li & Chris Brooks & Joelle Miffre, 2009. "Transaction Costs, Trading Volume and Momentum Strategies," ICMA Centre Discussion Papers in Finance, Henley Business School, Reading University icma-dp2009-04, Henley Business School, Reading University.
  20. Nawar, Hashem, 2010. "Industry Concentration and the Cross-section of Stock Returns: Evidence from the UK," MPRA Paper 28440, University Library of Munich, Germany, revised Nov 2010.

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