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The Profitability of Momentum Investing

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  • Weimin Lui
  • 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.

Suggested Citation

  • Weimin Lui & Norman Strong & Xinzhong Xu, 1999. "The Profitability of Momentum Investing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(9‐10), pages 1043-1091, November.
    • Handle: RePEc:bla:jbfnac:v:26:y:1999:i:9-10:p:1043-1091
    DOI: 10.1111/1468-5957.00286
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