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Is Momentum Due to Data-snooping?

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  • Johan Parmler
  • Andres Gonzalez

Abstract

This paper explores the profitability of momentum strategies, by investigating if a momentum strategy is superior to a benchmark model once the effects of data-snooping have been accounted for. Two data sets are considered. The first set of data consists of US stocks and the second one consists of Swedish stocks. For the US data strong evidence is found of a momentum effect and hence the hypothesis of weak market efficiency is rejected. Splitting the sample in two parts, it is found that the overall significance is driven by events in the earlier part of the sample. The results for the Swedish data indicate that momentum strategies based on individual stocks generate significant profits. A very weak or no momentum effect can be found when stocks are sorted into portfolios. Finally, and perhaps most importantly, results show that data-snooping bias can be very substantial. Neglecting the problem would lead to very different conclusions.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600880127
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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal The European Journal of Finance.

Volume (Year): 13 (2007)
Issue (Month): 4 ()
Pages: 301-318

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Handle: RePEc:taf:eurjfi:v:13:y:2007:i:4:p:301-318

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Related research

Keywords: Momentum strategies; data-snooping; benchmark model; market efficiency;

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  1. Savin, N.E., 1984. "Multiple hypothesis testing," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 14, pages 827-879 Elsevier.
  2. Lo, Andrew W & MacKinlay, A Craig, 1990. "Data-Snooping Biases in Tests of Financial Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 431-67.
  3. Hansen, Peter Reinhard, 2005. "A Test for Superior Predictive Ability," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 365-380, October.
  4. Jonathan Lewellen, 2002. "Momentum and Autocorrelation in Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 533-564, March.
  5. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
  6. K. Rouwenhorst, 1996. "International Momentum Strategies," Yale School of Management Working Papers ysm36, Yale School of Management, revised 01 Feb 2008.
  7. Tobias J. Moskowitz & Mark Grinblatt, . "Do Industries Explain Momentum?," CRSP working papers 352, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  8. Narasimhan Jegadeesh, 2001. "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations," Journal of Finance, American Finance Association, vol. 56(2), pages 699-720, 04.
  9. Conrad, Jennifer & Kaul, Gautam, 1998. "An Anatomy of Trading Strategies," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 489-519.
  10. Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, vol. 68(5), pages 1097-1126, September.
  11. Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. " Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
  12. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
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