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Are momentum profits driven by the cross-sectional dispersion in expected stock returns?

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  • Bhootra, Ajay
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    Abstract

    Consistent with the hypothesis that momentum profits are attributable to the cross-sectional dispersion in expected returns, Bulkley and Nawosah (2009) report that momentum is nonexistent in demeaned returns. Motivated by their work, I examine whether absence of momentum in demeaned returns is robust to methodological adjustments that mitigate microstructure biases. I find that with commonly employed techniques including skipping a month between the formation and holding periods and excluding firms priced less than $5 (penny stocks) from the sample, the mean monthly momentum profit in demeaned returns increases from -0.37% to 1.02% over the 1963 to 2006 sample period. The results highlight the critical importance of using microstructure screens in empirical momentum studies.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 14 (2011)
    Issue (Month): 3 (August)
    Pages: 494-513

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    Handle: RePEc:eee:finmar:v:14:y:2011:i:3:p:494-513

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    Web page: http://www.elsevier.com/locate/finmar

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    Keywords: Momentum Cross-sectional return dispersion Penny stocks;

    References

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    1. Harrison Hong & Terence Lim & Jeremy C. Stein, 2000. "Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies," Journal of Finance, American Finance Association, vol. 55(1), pages 265-295, 02.
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    16. Jegadeesh, Narasimhan, 1990. " Evidence of Predictable Behavior of Security Returns," Journal of Finance, American Finance Association, vol. 45(3), pages 881-98, July.
    17. Tarun Chordia & Lakshmanan Shivakumar, 2002. "Momentum, Business Cycle, and Time-varying Expected Returns," Journal of Finance, American Finance Association, vol. 57(2), pages 985-1019, 04.
    18. Eisdorfer, Assaf, 2008. "Delisted firms and momentum profits," Journal of Financial Markets, Elsevier, vol. 11(2), pages 160-179, May.
    19. John M. Griffin & Xiuqing Ji & J. Spencer Martin, 2003. "Momentum Investing and Business Cycle Risk: Evidence from Pole to Pole," Journal of Finance, American Finance Association, vol. 58(6), pages 2515-2547, December.
    20. Karl B. Diether & Kuan-Hui Lee & Ingrid M. Werner, 2009. "Short-Sale Strategies and Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 575-607, February.
    21. Bulkley, George & Nawosah, Vivekanand, 2009. "Can the Cross-Sectional Variation in Expected Stock Returns Explain Momentum?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(04), pages 777-794, August.
    22. Falkenstein, Eric G, 1996. " Preferences for Stock Characteristics as Revealed by Mutual Fund Portfolio Holdings," Journal of Finance, American Finance Association, vol. 51(1), pages 111-35, March.
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    Cited by:
    1. repec:eme:mfipps:v:36:y:2010:i:3:p:364-379 is not listed on IDEAS
    2. Waszczuk, Antonina, 2013. "A risk-based explanation of return patterns—Evidence from the Polish stock market," Emerging Markets Review, Elsevier, vol. 15(C), pages 186-210.
    3. Bhootra, Ajay & Hur, Jungshik, 2013. "The timing of 52-week high price and momentum," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3773-3782.

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