Abstract
PurposeThe present research aims to examine a range of momentum trading strategies for the tourism and hospitality sector.Design/methodology/approachThe paper followed the methodology of Jegadeesh and Titman (1993) to construct the portfolios. In this methodology, all portfolios were formed and evaluated by their cumulative stock returns over the past J periods and holding the position for the next K periods. In total, nine formation and holding periods were used, represented by 3, 6 and 12. For example, strategy 3–3 (that is, strategy with J = 3 and K = 3) refers to the strategy that stocks are ranked based on their previous three months and then held for the next three months.FindingsThe findings demonstrated that none of these momentum investing strategies was profitable. Most of the results, however, show positive, but insignificant momentum returns. This finding can be interpreted as price reversal over a horizon of three to twelve months in the US hospitality and tourism sector. These results are robust to size, different formation and holding combinations, beta and turnover.Research limitations/implicationsRegarding the research limitations, this paper only considers the US tourism and hospitality sector. Therefore, the extension of results to other developed and developing markets should be taken carefully. Also, this paper relies only on the methodology of Jegadeesh and Titman (1993). Other methodologies could be suitable avenues for future research.Practical implicationsInvestors and portfolio managers who seek for earning abnormal returns by investing in the US HT stocks can attain their hopes by constructing portfolios based on existing guidelines in the literature and adopting a short-term reversal trading strategy or by buying past losers and selling past winners of the US tourism and hospitality stocks.Originality/valueThis research contributes to the hospitality finance literature by offering the investors who are interested in the US hospitality and tourism sector an uncomplicated trading rule that uses real return data and is expected to generate actual returns. Moreover, the momentum strategy of Jegadeesh and Titman (1993) is never used in the hospitality finance literature.
Highlights
Are momentum trading strategies profitable for the US “tourism and hospitality” stocks? There are two reasons why this question is important
The explanation for this hypothesis is that the US HT stocks experience noise trading in the stock market (Chen et al, 2005). These noise traders commit systematic behavioral errors that may either prevent them from processing the information rationally, such as overconfidence, representativeness heuristics, underreaction and overreaction, or deprive them of having complete information, such as having information on only some securities not all securities in the market, making mistakes in forecasting due to the investors’ prior beliefs, not knowing the structural relationships in the economy or not knowing the correct data-generating process. These traders can be considered the key factor deviating the stock prices away from the fundamental value and destabilizing the market prices because they commit systematic mistakes or depend on improper probability assessment and sometimes trade using irrelevant information, resulting in a reduction in the market efficiency because they take positions and actions that prevent the new information from incorporating into prices, which keeps the prices away from the fundamental values and create some sort of predictability, e.g. momentum and reversal in stock returns (Brav and Heaton, 2002; Bloomfield et al, 2009)
Note(s): This table reports the industries that make up the tourism and hospitality sector, showing a two-digit industry in the whole
Summary
Are momentum trading strategies profitable for the US “tourism and hospitality” stocks (hereafter HT)? There are two reasons why this question is important. From a corporate point of view, financial markets provide long-term, stable sources of finance, especially because the HT industry requires intensive capital investment. The HT industry is crucial for economic growth and many are interested in investing in this industry. Published in European Journal of Management and Business. The full terms of this licence may be seen at http:// creativecommons.org/licences/by/4.0/legalcode
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