Is There Momentum in Cross-Sectional Anomalies?

Abstract

This article examines the performance of Tactical Stock Allocation, which is based on anomalous behavior of stocks. Specifically, it uses the Fama and French [1993] Small-Minus-Big and High-Minus-Low factors and price-to-earnings ratio sorted returns over the period from 1970 to 2007 to characterize the anomalies. The authors find that a diversified strategy of tactical investing on these factors is capable of producing abnormal returns. However, tactical investing on the first two characterized anomalies is inferior to that of the price-earnings anomaly for the most recent period, thus implying changes in investors’ return-chasing behavior. Moreover, the evidence suggests that the anomalies related to the ratios exhibit momentum, and investors should invest in the best-performing anomaly of the month.