Momentum strategies: some bootstrap tests

Abstract

Abstract This study introduces a new estimation-based bootstrap simulation procedure to test whether different returns-generating models can explain the profitability of momentum strategies first documented by Jegadeesh and Titman [J. Finance 48 (1993)]. We incorporate simple random walk and multifactor models and allow for autocorrelation, cross-correlation, conditional heteroskedasticity and predictability through conditioning information variables. We also evaluate alternative sampling procedures for the bootstrap simulations. None of the models, however, are able to generate simulated profits as large as the actual profits. We do find, however, that accounting for time-varying expected returns with market-wide and macroeconomic instrumental variables can explain 75–80% of the profits.