Trading Strategies Based on Past Returns Evidence from Germany

Abstract

Among the various strategies studied, only momentum investing appears to earn persistently non-zero returns. Over the total time period from 1965 to 2014, the classical momentum strategy based on performance over the past two to twelve months earned an average return of 1.57% per month (excluding microcap stocks and value-weight returns). In the most recent ten-year time period, it has been even larger: 2.27%, which is much larger than in the U.S. However, the profitability net of transaction costs appears weak because the strategy involves trading in disproportionately small stocks with high transaction costs, especially observed for the loser portfolio. A strategy that only concentrates on the winner portfolio and thus avoids potential problems associated with (short) selling the costly loser portfolio appears to earn strong and persistently abnormal profits, even after transaction costs.