Abstract
This paper shows that momentum-based strategies have exhibited high excess returns during the last several decades, especially in December and January. The effect of trading on prices, however, limits the amount that can be invested in such strategies. We find that after taking into account the price impact induced by trades, no more than $200 million can be invested before the apparent profit opportunities vanish. Thus, despite the failure of factor models to explain the persistence of momentum returns at the turn-of-the-year, actual trading does not award abnormal profits. Thus, the existence of momentum seasonality does not contradict the efficient market hypothesis.
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