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Are momentum profits driven by the cross-sectional dispersion in expected stock returns?

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  • Bhootra, Ajay

Abstract

Consistent with the hypothesis that momentum profits are attributable to the cross-sectional dispersion in expected returns, Bulkley and Nawosah (2009) report that momentum is nonexistent in demeaned returns. Motivated by their work, I examine whether absence of momentum in demeaned returns is robust to methodological adjustments that mitigate microstructure biases. I find that with commonly employed techniques including skipping a month between the formation and holding periods and excluding firms priced less than $5 (penny stocks) from the sample, the mean monthly momentum profit in demeaned returns increases from -0.37% to 1.02% over the 1963 to 2006 sample period. The results highlight the critical importance of using microstructure screens in empirical momentum studies.

Suggested Citation

  • Bhootra, Ajay, 2011. "Are momentum profits driven by the cross-sectional dispersion in expected stock returns?," Journal of Financial Markets, Elsevier, vol. 14(3), pages 494-513, August.
  • Handle: RePEc:eee:finmar:v:14:y:2011:i:3:p:494-513
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    Cited by:

    1. Chen, Chun-Da & Demirer, Riza & Jategaonkar, Shrikant P., 2015. "Risk and return in the Chinese stock market: Does equity return dispersion proxy risk?," Pacific-Basin Finance Journal, Elsevier, vol. 33(C), pages 23-37.
    2. Maio, Paulo, 2016. "Cross-sectional return dispersion and the equity premium," Journal of Financial Markets, Elsevier, vol. 29(C), pages 87-109.
    3. Low, Rand Kwong Yew & Tan, Enoch, 2016. "The role of analyst forecasts in the momentum effect," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 67-84.
    4. Bhootra, Ajay & Hur, Jungshik, 2013. "The timing of 52-week high price and momentum," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3773-3782.
    5. Clark, Ephraim & Kassimatis, Konstantinos, 2014. "Exploiting stochastic dominance to generate abnormal stock returns," Journal of Financial Markets, Elsevier, vol. 20(C), pages 20-38.
    6. Waszczuk, Antonina, 2013. "A risk-based explanation of return patterns—Evidence from the Polish stock market," Emerging Markets Review, Elsevier, vol. 15(C), pages 186-210.
    7. repec:eme:mfipps:v:36:y:2010:i:3:p:364-379 is not listed on IDEAS

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