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Informed momentum trading versus uninformed "naive" investors strategies

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  • Banerjee, Anurag
  • Hung, Chi-Hsiou

Abstract

We construct a zero net-worth uninformed "naive investor" who uses a random portfolio allocation strategy. We then compare the returns of the momentum strategist to the return distribution of naive investors. For this purpose we reward momentum profits relative to the return percentiles of the naive investors with scores that are symmetric around the median. The score function thus constructed is invariant and robust to risk factor models. We find that the average scores of the momentum strategies are close to zero (the score of the median) and statistically insignificant over the sample period between 1926 and 2005, various sub-sample periods including the periods examined in (Jegadeesh and Titman, 1993) and (Jegadeesh and Titman, 2001). The findings are robust with respect to sampling or period-specific effects, tightened score intervals, and the imposition of maximum-weight restrictions on the naive strategies to mitigate market friction considerations.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 11 (November)
Pages: 3077-3089

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:11:p:3077-3089

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

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Keywords: Momentum Naive strategies Return percentiles Price information;

References

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  18. Chi-Hsiou Hung, 2008. "Return Predictability of Higher-Moment CAPM Market Models," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(7-8), pages 998-1022.
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Cited by:
  1. Andrew Clare & James Seaton & Peter N. Smith & Stephen Thomas, 2013. "The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation," CAMA Working Papers 2013-24, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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