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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. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December.
  2. Kent Daniel & Sheridan Titman, 1996. "Evidence on the Characteristics of Cross Sectional Variation in Stock Returns," NBER Working Papers 5604, National Bureau of Economic Research, Inc.
  3. K. Geert Rouwenhorst, 1998. "International Momentum Strategies," Journal of Finance, American Finance Association, vol. 53(1), pages 267-284, 02.
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  5. Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. " Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
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  7. Spiess, D. Katherine & Affleck-Graves, John, 1995. "Underperformance in long-run stock returns following seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 38(3), pages 243-267, July.
  8. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
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  10. Lo, Andrew W. (Andrew Wen-Chuan) & MacKinlay, Archie Craig, 1955-., 1989. "When are contrarian profits due to stock market overreaction?," Working papers 3008-89., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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  12. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. " Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-78, December.
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  14. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
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  16. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
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Citations

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Cited by:
  1. Malin, Mirela & Bornholt, Graham, 2010. "Predictability of future index returns based on the 52-week high strategy," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 501-508, November.
  2. Minardi, A., 2001. "Preços Passados prevendo Desempenho de Ações Brasileiras," Finance Lab Working Papers flwp_43, Finance Lab, Insper Instituto de Ensino e Pesquisa.
  3. Safieddine, Assem & Sonti, Ramana, 2007. "Momentum and industry growth," Review of Financial Economics, Elsevier, vol. 16(2), pages 203-215.
  4. Aggarwal, Raj & Akhigbe, Aigbe & Mohanty, Sunil K., 2012. "Oil price shocks and transportation firm asset prices," Energy Economics, Elsevier, vol. 34(5), pages 1370-1379.
  5. Tuomo Vuolteenaho, 2001. "What Drives Firm-Level Stock Returns?," NBER Working Papers 8240, National Bureau of Economic Research, Inc.
  6. Tai, Chu-Sheng, 2003. "Are Fama-French and momentum factors really priced?," Journal of Multinational Financial Management, Elsevier, vol. 13(4-5), pages 359-384, December.

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