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Is Momentum Due to Data-Snooping?

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  • Ericsson, Johan

    ()
    (Dept. of Economic Statistics, Stockholm School of Economics)

  • González, Andrés

    ()
    (Dept. of Economic Statistics, Stockholm School of Economics)

Abstract

This paper explores the profitability of portfolio-based momentum strategies. The data consists of all NYSE, AMEX, and NASDAQ stocks on the CRSP database. The analysis considers the period July 1963 to December 2002 and the tests are performed on portfolios formed on industry, size and book-to-market. The departure from earlier studies lies in the way we test for profitability. To avoid the serious problem of data-snooping we apply the procedure provided by White (2000). Overall, we find strong evidence of a momentum effect where an investor takes a long position on the winner portfolio and a short position on the loser portfolio. Hence, we reject the hypothesis of weak market efficiency. Splitting the sample in two parts, 1963:07 to 1981:12 and 1982:01 to 2002:12 we found that the best momentum strategy was profitable during the first period and not during the second. The overall significance is thus driven by events in the earlier part of the sample and it appears that the market has become more efficient.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 536.

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Length: 13 pages
Date of creation: 25 Sep 2003
Date of revision:
Handle: RePEc:hhs:hastef:0536

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Keywords: Momentum; Data-snooping; Bootstrap;

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  1. Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. " Momentum Strategies," Journal of Finance, American Finance Association, American Finance Association, vol. 51(5), pages 1681-1713, December.
  2. Lo, Andrew W. (Andrew Wen-Chuan) & MacKinlay, Archie Craig, 1955-, 1989. "Data-snooping biases in tests of financial asset pricing models," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 3020-89., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Tobias J. Moskowitz & Mark Grinblatt, 1999. "Do Industries Explain Momentum?," Journal of Finance, American Finance Association, American Finance Association, vol. 54(4), pages 1249-1290, 08.
  4. Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, Econometric Society, vol. 68(5), pages 1097-1126, September.
  5. Hansen, Peter Reinhard, 2005. "A Test for Superior Predictive Ability," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 23, pages 365-380, October.
  6. Savin, N.E., 1984. "Multiple hypothesis testing," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 14, pages 827-879 Elsevier.
  7. K. Rouwenhorst, 1996. "International Momentum Strategies," Yale School of Management Working Papers, Yale School of Management ysm36, Yale School of Management, revised 01 Feb 2008.
  8. Conrad, Jennifer & Kaul, Gautam, 1998. "An Anatomy of Trading Strategies," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(3), pages 489-519.
  9. Jonathan Lewellen, 2002. "Momentum and Autocorrelation in Stock Returns," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(2), pages 533-564, March.
  10. Narasimhan Jegadeesh, 2001. "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations," Journal of Finance, American Finance Association, American Finance Association, vol. 56(2), pages 699-720, 04.
  11. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, American Finance Association, vol. 51(1), pages 55-84, March.
  12. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, American Finance Association, vol. 48(1), pages 65-91, March.
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Cited by:
  1. Badreddine, Sina & Galariotis, Emilios C. & Holmes, Phil, 2012. "The relevance of information and trading costs in explaining momentum profits: Evidence from optioned and non-optioned stocks," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 22(3), pages 589-608.

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