Quarterly seasonality and momentum strategy implementation

Abstract

PurposeMomentum strategies exhibit quarterly seasonality, earning significantly higher average strategy returns in the third month of the quarter than the first month. The authors evaluate the magnitude of quarterly seasonality in various momentum strategies to examine the relation between quarterly seasonality and risk-adjusted monthly returns.Design/methodology/approachThe authors construct long-short portfolios for various types of momentum strategies and calculate the average returns of these portfolios in the three months of the quarter. They also calculate the average changes in institutional ownership across the different portfolios.FindingsThe authors demonstrate that quarterly seasonality is directly associated with quarterly changes in net purchases by institutional investors. Additionally, they show that near-term price momentum exhibits more seasonality than other momentum strategies, consistent with institutional investor incentives.Research limitations/implicationsResearchers studying momentum should understand that quarterly seasonality increases the standard deviation of monthly returns for different types of momentum strategies.Practical implicationsIndividual investors and investment managers should consider whether it is early or late in the calendar quarter when implementing momentum strategies.Originality/valueQuarterly seasonality explains several seemingly independent findings in the momentum literature. In cases where researchers show one momentum strategy outperforms another on a risk-adjusted basis, the authors find that the superior strategy exhibits less quarterly seasonality. This pattern holds across types of momentum strategies, strategy formation periods and asset classes.