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Abnormal returns with momentum/contrarian strategies using exchange-traded funds

Author

Listed:
  • Jack C De Jong

    (School of Travel Industry Management, University of Hawaii)

  • S Ghon Rhee

Abstract

Investing in portfolios of exchange-traded funds (ETFs) provides abnormal returns that exceed transactions costs, when returns are adjusted for risk using Fama and French's three-factor model. Short formation and holding periods of one day to one week provide abnormal contrarian returns, as past losers become winners and past winners become losers. Medium formation and holding periods of 4–39 weeks provide abnormal momentum returns, as past winners keep winning and past losers keep losing. Abnormal returns for portfolios of ETFs result in an asset allocation setting including all four types of ETFs, namely domestic, international, sector, and bond ETFs, with contrarian returns maximised over a one-day formation and holding period, and with momentum returns maximised over a 20-week formation and holding period.

Suggested Citation

  • Jack C De Jong & S Ghon Rhee, 2008. "Abnormal returns with momentum/contrarian strategies using exchange-traded funds," Journal of Asset Management, Palgrave Macmillan, vol. 9(4), pages 289-299, October.
    • Handle: RePEc:pal:assmgt:v:9:y:2008:i:4:d:10.1057_jam.2008.27
    DOI: 10.1057/jam.2008.27
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    References listed on IDEAS

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    Cited by:

    1. Bruce Vanstone & Tobias Hahn & Dean Earea, 2021. "Industry momentum: an exchange‐traded funds approach," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4007-4024, September.
    2. Ding Du & Karen Craft Denning & Xiaobing Zhao, 2014. "Market states and momentum in sector exchange-traded funds," Journal of Asset Management, Palgrave Macmillan, vol. 15(4), pages 223-237, August.
    3. Rohnn Sanderson & Nancy L. Lumpkin-Sowers, 2018. "Buy and Hold in the New Age of Stock Market Volatility: A Story about ETFs," IJFS, MDPI, vol. 6(3), pages 1-14, September.
    4. Muhammad M Islam & Lawrence Gomes, 2011. "Momentum change, industry group rotation and portfolio returns," Journal of Asset Management, Palgrave Macmillan, vol. 12(6), pages 426-437, December.
    5. Laura Andreu & Laurens Swinkels & Liam Tjong-A-Tjoe, 2013. "Can exchange traded funds be used to exploit industry and country momentum?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(2), pages 127-148, June.

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