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Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics

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Author Info

  • Pavel Bandarchuk

    (State Street Global Advisors)

  • Jens Hilscher

    ()
    (International Business School, Brandeis University)

Abstract

Several recent studies document that sorting stocks first on certain stock-level characteristics and then on past returns results in elevated momentum profits. We show that such strategies enhance momentum profits simply by trading in stocks with more extreme past returns. Adjusted for this effect, elevated momentum profits resulting from characteristics (size, R², turnover, age, analyst coverage, analyst forecast dispersion, market-to-book, price, illiquidity, credit rating) disappear almost entirely. Interaction patterns have been used to support behavioral and limits-to-arbitrage explanations of momentum; our findings imply that explanations of momentum should instead focus on the link between momentum profits and extreme past returns.

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File URL: http://www.brandeis.edu/departments/economics/RePEc/brd/doc/Brandeis_WP38.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 38.

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Length: 48 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:brd:wpaper:38

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Postal: MS032, P.O. Box 9110, Waltham, MA 02454-9110
Web page: http://www.brandeis.edu/departments/economics/
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Related research

Keywords: Momentum; Past Returns; Volatility; Stock-level Characteristics; Double Sorts;

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Cited by:
  1. Andrew Clare & James Seaton & Peter N. Smith & Stephen Thomas, 2012. "Trend Following, Risk Parity and Momentum in Commodity Futures," Discussion Papers 12/28, Department of Economics, University of York.
  2. Clare, Andrew & Seaton, James & Smith, Peter N. & Thomas, Stephen, 2014. "Trend following, risk parity and momentum in commodity futures," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 1-12.

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