Momentum-based Strategies Research Articles

Overlapping momentum portfolios

Different momentum investors use different formation periods to evaluate past stock performance. We explore the consequences of this diversity by studying the stocks that are the likely constituents of the portfolios of the heterogeneous momentum investors that coexist in practice. We show that stocks in the intersection of the 6 and 12-month momentum portfolios—“overlapping” momentum stocks—display enhanced medium-term return momentum. This finding is robust to considering a broad set of risk factors, transaction costs, and alternative explanations. Focusing on overlapping momentum stocks improves the returns of several momentum-based strategies proposed in the literature. The results are in line with the concurrence of trades by heterogeneous momentum investors exacerbating return continuation.

Strategies in Retirement Fund Selection in the Mexican Retirement Market 1997-2018

Objective: This research studies individual investment strategies that can be employed by Mexican workers to choose a retirement savings company, to provide evidence that can guide workers and governments in their pursuit for a higher replacement rate. Methods: To accomplish such task, more than 200,000 individual decisions in rolling-windows are simulated, based on more than twenty-years of market prices on retirement funds in Mexico (1997-2018). Outcome: Results indicate that contrarian-based strategies dominate momentum-based strategies in three out of four categories of funds. Recommendations: Moreover, in two out of four categories of funds the highest return is reached by the system’s average, calling for the introduction of an ETF-type of product to the Mexican financial market. Originality: The novelty of this research resides in the perspective of the analysis, positioning the Mexican worker in the role of an investor making a financial choice. Conclusions: The maximum average return is the best way to select a retirement fund manager when there is a guaranteed minimum pension, which acts as a risk-hedge, as it is in the Mexican case.

Strategies in Retirement Fund Selection in the Mexican Retirement Market 1997-2018

Objective: This research studies individual investment strategies that can be employed by Mexican workers to choose a retirement savings company, to provide evidence that can guide workers and governments in their pursuit for a higher replacement rate. Methods: To accomplish such task, more than 200,000 individual decisions in rolling-windows are simulated, based on more than twenty-years of market prices on retirement funds in Mexico (1997-2018). Outcome: Results indicate that contrarian-based strategies dominate momentum-based strategies in three out of four categories of funds. Recommendations: Moreover, in two out of four categories of funds the highest return is reached by the system’s average, calling for the introduction of an ETF-type of product to the Mexican financial market. Originality: The novelty of this research resides in the perspective of the analysis, positioning the Mexican worker in the role of an investor making a financial choice. Conclusions: The maximum average return is the best way to select a retirement fund manager when there is a guaranteed minimum pension, which acts as a risk-hedge, as it is in the Mexican case.

A Functional Modeling Approach to Stock Market Momentum

This paper proposes a novel dynamic function to capture the phenomenon of momentum in financial markets. It occurs when high returns subsequently follow a security’s past high returns, and subsequent low returns follow its past low returns. By exploring an analogy to the momentum definition from physics, we model financial momentum as the product of a stock’s return and its number of shares outstanding with considerations of the difference between its market price and intrinsic price. In contrast to traditional proxies, where the momentum is described as the rate of acceleration of a security’s price or volume and is calculated based on past 12-month returns or the associated accumulation in returns, the dynamics of our model exhibit advantageous trading characteristics for common momentum-based strategies.

The acceleration effect and Gamma factor in asset pricing

We report strong evidence that changes of momentum, i.e. “acceleration”, defined as the first difference of successive returns, is a novel effect complementing momentum of stock returns. Γ-strategies based on the “acceleration” effect are on average quite profitable and beat momentum-based strategies in two-third among a large panel of parameterizations. The “acceleration” effect, which we argue is associated with procyclical mechanisms, help elucidate many previous reports of transient non-sustainable accelerating (upward or downward) log-prices as well as many anomalies associated with the momentum factor. However, within standard asset pricing tests, Γ-pricing factors are poorer at explaining momentum-sorted portfolios than the reverse. This can be rationalized by the fact that the Γ effect represents the existence of transient positive feedbacks influencing the price formation process, which is only prevalent during special stock market regimes. Standard asset pricing tests are thus not the best suited to deal with such transient effects.

Acting without Action: Connecting Chinese and Western Perspectives on Momentum

Momentum is increasingly recognized as having a significant influence on the success or failure of organizational change efforts. Despite a proliferation of research on momentum, the plurality of perspectives has generated a rather compartmentalized understanding of social mechanism of momentum. In this article, we draw upon Eastern philosophical and management traditions to identify conditions under which seemingly contradictory explanations may be reconciled, and develop a cognitive-configuration model of momentum that advances understanding of the interrelationships amongst momentum, human agency, and organizational change. The model foregrounds an “indirect” form of change agency, wherein change agents recognize, assess, and leverage momentum as a substitute for direct interventions. We articulate three momentum-based strategies for enacting organizational change, each of which implicates a different role for change agents and varying degrees of momentum affordance.

Momentum Strategies for the ETF-Based Portfolios

We compared performance of past ‘winners’ and past ‘losers’ over the look-ahead period of one month for various portfolios that consist of the US ETFs and the holdings of the US equity Select Sector SPDRs in 2007 – 2017 and 2011 - 2017. Namely, we verified the conventional pattern described in the literature according to which there is mean reversion (i.e. past losers outperform past winners in near future) for short past periods and persistent momentum (i.e. past winners outperform past losers in near future) for longer past periods. We also compared performance of the momentum-based strategies with that of the equal-weight benchmark portfolios (EWBPs). We found that performance of the momentum strategies depends on portfolio holdings and whether the bear market of 2008 is included in the data sample. The conventional momentum pattern was statistically significant only for a multi-asset ETF portfolio in both 2007-2017 and 2011 -2017, and for the proxies of the SPDR S&P500 ETF and the Industrials Select Sector SPDR ETF in 2011 – 2017. However, we found other, sector-specific momentum patterns that may be explored for arbitraging past winners and past losers of the equity sector ETF holdings between themselves and/or with their EWBPs.

Relative value arbitrage in European commodity markets

This study offers insights into the profitability of convergence trading in European commodity markets, thereby shedding light on the compensation for enforcing the Law of One Price. We analyze profits of a cointegration-based statistical arbitrage strategy on a wide range of European energy sectors and indeed find economically and statistically significant risk-adjusted excess returns which are also different from simple contrarian and momentum-based strategies. More importantly, the magnitude of this intermediation fee seems to be linked to commodity specific frictions limiting arbitrage possibilities. Consistent to the limits to arbitrage literature (e.g. Shleifer and Vishny, 1997 or Xiong, 2001), we find that convergence traders in Europe's commodity markets tend to be non-diversified investors focusing on specific market niches.

Another look at momentum crashes: momentum in the European Monetary Union

This article studies the profitability of a selection of prominent momentum-based strategies in the European Monetary Union (EMU). In contrast to past examples documenting the lack of profitability of unconditional price momentum in the most recent decade, the current research finds that unconditional price momentum yielded significant positive payoffs. There is evidence of option-like behaviour for strategies based on intermediate past performance. Surprisingly, there is no such evidence for the momentum strategy based on recent past performance.

The Acceleration Effect and Gamma Factor in Asset Pricing

We report strong evidence that changes of momentum, i.e. defined as the first difference of successive returns, provide better performance and higher explanatory power than momentum. The corresponding Γ-factor explains the momentum-sorted portfolios entirely but not the reverse. Thus, momentum can be considered an imperfect proxy for acceleration, and its success can be attributed to its correlation to the predominant Γ-factor. Γ-strategies based on the acceleration effect are on average profitable and beat momentum-based strategies in two out of three cases, for a large panel of parameterizations. The acceleration effect and the Γ-factor profit from transient non-sustainable accelerating (upward or downward) log-prices associated with positive feedback mechanisms.

Another Look at Momentum Crashes

This paper studies the profitability of a selection of prominent momentum-based strategies in the European Monetary Union. In contrast to past examples documenting the lack of profitability of unconditional price momentum in the most recent decade, the current research finds that unconditional price momentum yielded significant positive payoffs. There is evidence of option-like behavior for strategies based on intermediate past performance. Surprisingly, there is no such evidence for the momentum strategy based on recent past performance .

Body size and the neural control of movement

Summary Nervous systems, muscles, and motor organs (biomechanics) generate movement cooperatively and should therefore change coordinately as body size changes. Proving this hypothesis requires a description of the nervous system, muscle, and biomechanics of individual species and comparison of these properties across a collection of species spanning a large size range. Obtaining these data in even one species is daunting, and we are far from reaching a general theory of how nervous system, muscle, and biomechanics depend on body size. Sufficient cross-species data nonetheless exist to identify some consequences of body size on the neural control of movement, which form the focus of this Primer: for example, locomotor cycle period depends on leg length; large animals should devote more neural resources to hazard avoidance and stride correction; the importance of gravity and momentum increases, and of passive muscle properties decreases, with limb size; and the medium in which movements occur affects these size dependencies. These considerations suggest that, in applying biological data to robotic design, proper ‘size' should be maintained across all levels (i.e., if small-animal neural mechanisms are used, so should small-animal muscle and biomechanical properties).

The Profitability of Momentum Trading Strategies in the Irish Equity Market

We examine the profitability of momentum-based trading strategies in the Irish equity market between 1988 and 2007. We investigate a range of trading strategies over alternative backward-looking ranking periods and forward-looking holding horizons as well as for alternative size momentum portfolios. We find that returns to momentum-based strategies are highly non-normally distributed, giving rise to concern about the validity ofinferences based on standard statistical tests of their abnormal performance. We therefore apply a bootstrap procedure to construct nonparametric p-values for the portfolio performance measures. Overall, we find little evidence that momentum-based trading strategies would have yielded an abnormal risk-adjusted return over the period. The Irish equity market appears to be quite efficient in this respect.

Do momentum-based strategies work in emerging currency markets?

Existing studies on the profitability of trading rules in the currency market focus mainly on the currencies of developed countries. The profitability of technical trading rules on the currencies of emerging economies is surprisingly understudied. This paper evaluates the profitability of technical trading rules in emerging currency markets. Similar to Okunev and White [Okunev, J. and White, D., (2003) “Do Momentum-based Strategies Still Work in Foreign Currency Markets?” Journal of Financial and Quantitative Analysis 38, 425–447.], 354 long/short moving average rules for six currencies are investigated. It is found that investing in emerging currencies can generate a considerable annual return of over 20%, even after a 5% annual transaction cost is imposed. The trading-rule profits are relatively stable across the 20 year sample period. Furthermore, the impact of financial crises on the trading-rule returns is also examined. It is found that the profitability of the trading rules is improved after the crises.

Momentum in Asset Returns

This article reviews research on momentum in asset markets, with an emphasis on research involving momentum in commodity markets. Commodity markets are different than the markets for financial assets, such as stocks and bonds. Storage costs, inventory levels, and hedging demand by suppliers and producers influence commodity prices in ways that may not be observed in other asset classes. Research indicates that momentum profits are related to these market structure factors. The persistence of momentum in commodity markets has implications for investment products that incorporate commodities. The popularity of commodity investments among institutional investors has increased dramatically in the past decade. While some investors have allocated funds to hedge funds that incorporate momentum-based strategies, most of these investments are in indices that do not have a momentum component to the return. Research indicates that adding a momentum component to a commodity portfolio may provide strategic benefits in the form of higher risk-adjusted returns and reduced volatility.

The Seasonality of Momemtum: Analysis of Tradability

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.

Are Momentum Profits Robust to Trading Costs?

This paper tests whether momentum-based strategies remain profitable after considering market frictions, in particular price concessions induced by trading. Alternative measures of price impact are estimated and applied to alternative momentum-based trading rules. The performance of traditional momentum strategies, in addition to strategies designed to reduce the cost of trades, is evaluated. We find that, after taking into account the price impact induced by trades, as much as 5 billion dollars (relative to December 1999 market capitalization) may be invested in some momentum-based strategies before the apparent profit opportunities vanish. Other, extensively studied, momentum strategies are not implementable on a large scale. The persistence of momentum returns exhibited in the data remains an important challenge to the asset-pricing literature.

Do Momentum-Based Strategies Still Work in Foreign Currency Markets?

This paper examines the performance of momentum trading strategies in foreign exchange markets. We find the well-documented profitability of momentum strategies during the 1970s and the 1980s has continued throughout the 1990s. Our approach and findings are insensitive to the specification of the trading rule and the base currency for analysis. Finally, we show that the performance is not due to a time-varying risk premium but rather depends on the underlying autocorrelation structure of the currency returns. In sum, the results lend further support to prior momentum studies on equities. The profitability to momentum-based strategies holds for currencies as well.