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Profitability of Momentum Strategies: An Evaluation of Alternative Explanations

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  • Narasimhan Jegadeesh
  • Sheridan Titman

Abstract

This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990's suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions which are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. Although we find no evidence of significant return reversals in the 2 to 3 years following the following formation date, there are significant return reversals 4 to 5 years after the formation date. Our analysis of post-hiding period returns sharply rejects a claim in the literature that the observed momentum profits can be explained completely by the cross-sectional dispersion in expected returns.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7159.

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Date of creation: Jun 1999
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Publication status: published as Jegadeesh, Narasimhan and Sheridan Titman. "Profitability Of Momentum Strategies: An Evaluation Of Alternative Explanations," Journal of Finance, 2001, v56(2,Apr), 699-720.
Handle: RePEc:nbr:nberwo:7159

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  1. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, American Finance Association, vol. 50(1), pages 23-51, March.
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  3. Harrison Hong & Jeremy C. Stein, 1997. "A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets," NBER Working Papers 6324, National Bureau of Economic Research, Inc.
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  7. Josef Lakonishok & Robert W. Vishny & Andrei Shleifer, 1993. "Contrarian Investment, Extrapolation, and Risk," NBER Working Papers 4360, National Bureau of Economic Research, Inc.
  8. Daniel, Kent & Titman, Sheridan, 1997. " Evidence on the Characteristics of Cross Sectional Variation in Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 1-33, March.
  9. Keim, Donald B., 1983. "Size-related anomalies and stock return seasonality : Further empirical evidence," Journal of Financial Economics, Elsevier, Elsevier, vol. 12(1), pages 13-32, June.
  10. 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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  16. 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.
  17. 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.
  18. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, American Finance Association, vol. 53(6), pages 1839-1885, December.
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Cited by:
  1. Mirela Malin & Graham Bornholt, 2009. "Predictability of Future Index Returns based on the 52 Week High Strategy," Discussion Papers in Finance finance:200907, Griffith University, Department of Accounting, Finance and Economics.
  2. Tai, Chu-Sheng, 2003. "Are Fama-French and momentum factors really priced?," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 13(4-5), pages 359-384, December.
  3. Tuomo Vuolteenaho, 2001. "What Drives Firm-Level Stock Returns?," NBER Working Papers 8240, National Bureau of Economic Research, Inc.
  4. Safieddine, Assem & Sonti, Ramana, 2007. "Momentum and industry growth," Review of Financial Economics, Elsevier, Elsevier, vol. 16(2), pages 203-215.
  5. Aggarwal, Raj & Akhigbe, Aigbe & Mohanty, Sunil K., 2012. "Oil price shocks and transportation firm asset prices," Energy Economics, Elsevier, Elsevier, vol. 34(5), pages 1370-1379.
  6. Minardi, A., 2001. "Preços Passados prevendo Desempenho de Ações Brasileiras," Finance Lab Working Papers, Finance Lab, Insper Instituto de Ensino e Pesquisa flwp_43, Finance Lab, Insper Instituto de Ensino e Pesquisa.

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