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Extreme absolute strength of stocks and performance of momentum strategies

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  • Yang, Xuebing
  • Zhang, Huilan

Abstract

We find that removing stocks with extreme absolute strength from typical momentum portfolios can enhance their performance. Using data on common stocks traded on NYSE, AMEX, and NASDAQ, we find that stocks with extreme absolute strength feature very high volatility and are more likely to lose their momentum. Removing these stocks from typical momentum portfolios significantly reduces the volatility of the portfolios and increases the average return in most cases, improving the portfolios' performance. The removal of stocks with extreme absolute strength can also effectively alleviate the problem of momentum crashes and render momentum strategies profitable in the post-2000 era, a period during which momentum appears to have vanished.

Suggested Citation

  • Yang, Xuebing & Zhang, Huilan, 2019. "Extreme absolute strength of stocks and performance of momentum strategies," Journal of Financial Markets, Elsevier, vol. 44(C), pages 71-90.
    • Handle: RePEc:eee:finmar:v:44:y:2019:i:c:p:71-90
    DOI: 10.1016/j.finmar.2019.01.001
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    Cited by:

    1. Ivan Cherednik, 2019. "Artificial intelligence approach to momentum risk-taking," Papers 1911.08448, arXiv.org, revised Mar 2020.
    2. Xiang, Yun & He, Jiaxuan, 2022. "Pairs trading and asset pricing," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    3. Berggrun, Luis & Cardona, Emilio & Lizarzaburu, Edmundo, 2020. "Profitability of momentum strategies in Latin America," International Review of Financial Analysis, Elsevier, vol. 70(C).
    4. Lin, Chaonan & Xia, Chuanxin & Yang, Nien-Tzu & Yang, Sheng-Yung, 2020. "Enhancing momentum profits in the Taiwan Stock Market: The role of extreme absolute strength," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    5. Chien-Liang Chiu & Paoyu Huang & Min-Yuh Day & Yensen Ni & Yuhsin Chen, 2024. "Mastery of “Monthly Effects”: Big Data Insights into Contrarian Strategies for DJI 30 and NDX 100 Stocks over a Two-Decade Period," Mathematics, MDPI, vol. 12(2), pages 1-22, January.
    6. Dong, Liang & Dai, Yiqing & Haque, Tariq & Kot, Hung Wan & Yamada, Takeshi, 2022. "Coskewness and reversal of momentum returns: The US and international evidence," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 241-264.
    7. Sim, Myounghwa & Kim, Hee-Eun, 2022. "Salience theory and enhancing momentum profits," Finance Research Letters, Elsevier, vol. 50(C).

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    More about this item

    Keywords

    Momentum strategies; Extreme absolute strength;

    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

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