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Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics

  • Pavel Bandarchuk

    (State Street Global Advisors)

  • Jens Hilscher

    ()

    (International Business School, Brandeis University)

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
Download Restriction: no

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
Contact details of provider: Postal: MS032, P.O. Box 9110, Waltham, MA 02454-9110
Web page: http://www.brandeis.edu/departments/economics/

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