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Salience theory and enhancing momentum profits

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  • Sim, Myounghwa
  • Kim, Hee-Eun

Abstract

Salience theory predicts that stocks with salient upsides are overvalued and earn lower subsequent returns, whereas those with salient downsides are undervalued and generate higher future returns. This study investigates an enhanced momentum strategy excluding stocks with extremely salient payoffs which attenuate the profitability of the momentum strategy. We find that this approach generates a significantly higher return and Sharpe ratio than the traditional momentum strategy. We further find that the performance improvement is more prominent for loser portfolios than for winner portfolios.

Suggested Citation

  • Sim, Myounghwa & Kim, Hee-Eun, 2022. "Salience theory and enhancing momentum profits," Finance Research Letters, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322004627
    DOI: 10.1016/j.frl.2022.103274
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    More about this item

    Keywords

    Momentum strategy; Salience theory;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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