Stock Momentum Research Articles

The usefulness of firm risk disclosures under different firm riskiness, investor-interest, and market conditions: New evidence from Finland

To date, there is only meager research evidence on the usefulness of mandatory annual report risk disclosures to investors. Although it has been argued that corporate disclosure decreases information asymmetry between management and shareholders, we do not know whether investors benefit from high-quality risk reporting in a highly regulated risk disclosure environment. In this paper, we performed association tests to examine whether the quality of firms' mandatory risk disclosures relate to information asymmetry in the Finnish stock markets. In addition, we analyzed whether the usefulness of risk disclosures depends on contingency factors such as firm riskiness, investor interest, and market condition. We demonstrate that the quality of risk disclosure has a direct negative influence on information asymmetry. We also document that risk disclosures are more useful if they are provided by small firms, high tech firms, and firms with low analyst coverage. We also found that momentum in stock markets affects the relevance of firms' risk reports.

An Emerging Markets Analysis of the Piotroski F Score

We examine the F score in global emerging markets and show there is a meaningful premium attached to high F score stocks which is unrelated to the size, value and momentum premiums. It is larger for high value stocks, moderately higher for high momentum stocks and unrelated to stock size. This suggests the usual explanation for the power of the F score – investor neglect of high F score stocks – is incomplete because big cap and high momentum stocks are typically not neglected. We conjecture another factor shaping the premium to high F score stocks is the confirmation bias.

Slow Di ffusion of Information and Price Momentum in Stocks: Evidence from Options Markets

Slow Di ffusion of Information and Price Momentum in Stocks: Evidence from Options Markets

The Disposition Effect and Momentum: Evidence from Norwegian Household Investors

Using a novel investor accounts dataset from Norway, I find that household investors are particularly likely to sell stocks when they experience a capital gain between 0% and 5%. The likelihood of a sale falls quickly both below and above this range; big losses and big gains are equally unlikely to trigger a sale. Thus, the disposition eff ect is driven by sales close to break-even, rather than a monotonically increasing relation between current capital gain and the likelihood of a sale. I also find that this household investor trading pattern contributes to momentum in small cap stocks.

Application Of Tactical Style Allocation For Global Equity Portfolios

Our earlier study suggests that there exists specific timing for the two prominent investment styles, value and momentum. We extend our prior research to test and evaluate a tactical style allocation (TSA) model based on the weighted least squares (WLS) technique for global equities over the out-of-sample period from 1994 through 2008. Two TSA style-based portfolios are constructed in this research, namely, a portfolio with the risk-free proxy (cash component), the global momentum index and the global value index as its constituents, and a portfolio that is comprised of only the global momentum index and the global value index. The optimized portfolios based on the TSA model outperform the MSCI World Index, the global value index and the global momentum index on a risk-adjusted basis over the examination period. The cash component of the style-based portfolio appears to provide necessary protection during financial market crises. The results of our study support the use of the proposed TSA model to perform active style rotation between value stocks and momentum stocks for global equity portfolios.

The Social Dynamics of Performance

A pervasive empirical finding is that mutual fund managers do not maintain their performance. In this paper, I show that social interactions can explain this fact. To do so, I allow a “crowd” of managers to meet at random times and exchange ideas within a rational-expectations equilibrium model. I show that social interactions simultaneously allow prices to become more efficient and better-informed managers to reap larger profits. Yet, social interactions cause managers’ alpha to become insignificant. The main implication is that increased efficiency causes managers to implement passive investment strategies for which they should not be rewarded. In addition, by increasing price informativeness, social interactions produce momentum in stock returns and induce most managers to become momentum traders, consistent with empirical findings.

Short-Term Momentum and Reversals in Large Stocks

Using stocks traded on the NYSE, AMEX and NASDAQ for the period of 1964 to 2009, this study demonstrates that, while momentum prevails among small stocks, momentum and reversals coexist among large stocks for a holding period of up to six months. The momentum/reversal divide is along the volatility dimension: Large-cap/low-volatility stocks exhibit reversals while large-cap/high-volatility stocks experience momentum. Our finding is in sharp contrast with those in the existing literature which mostly documents and explains momentum and reversals for different horizons. As such, our study not only offers fresh, new empirical findings on cross-section return predictability but also poses a challenge to the existing theoretical paradigms that are tailored to sequential occurrence of momentum and reversals. Specifically, we contribute to the literature by 1) uncovering a new empirical regularity which explains why large stocks are generally associated with no or weak momentum in the short-term, and 2) advancing a theoretical model based on moderated confidence which can rationalize empirical findings such as the one in the current paper where underreaction and overreaction can occur simultaneously with the same investor.

Islamic investing

Using a large international sample of 35 developed and emerging markets, we analyze whether Islamic indices exhibit a different performance to conventional benchmarks. While there is no compelling evidence of performance differences in robust Sharpe ratio tests and after controlling for market risk, we find a significantly positive four-factor alpha for the aggregate developed markets region. This outperformance stems, however, mainly from the U.S. and is largely attributable to the exclusion of financial stocks in Sharia-screened portfolios. As the extensive downturn of financials is related to the recent financial crisis, we do not argue that this outperformance will continue over time. The style analysis reveals that Islamic indices invest mainly in growth stocks and positive momentum stocks. This, for a passive portfolio intriguing result can, however, be explained by the strong sector allocation towards energy firms and their strong momentum characteristic during the sample period.

Momentum and Reversal: Does What Goes Up Always Come Down?

Stocks in a momentum portfolio, which contribute to momentum profits, do not experience reversal in the long run. Conversely, stocks that do not contribute to momentum profits exhibit subsequent reversals. Merging these separate securities into a single portfolio causes momentum and reversal patterns to appear linked. Stocks with momentum can be separated from those that exhibit reversal using stock characteristics. A portfolio that isolates momentum stocks displays large and persistent risk adjusted returns, which do not vary with behavioral proxies. Our results provide some direction for potential explanations of momentum patterns in returns.

Statistical Arbitrage and Market Efficiency: Enhanced Theory, Robust Tests and Further Applications

Statistical arbitrage enables tests of market efficiency which circumvent the joint-hypotheses dilemma. This paper makes several contributions to the statistical arbitrage framework. First, we enlarge the set of statistical arbitrage opportunities in Hogan, Jarrow, Teo, and Warachka (2004) to avoid penalizing incremental trading profits with positive deviations from their expected value. Second, we provide a statistical methodology to remedy the lack of consistency and statistical power in their Bonferroni approach. In addition, this procedure allows for autocorrelation and non-normality in trading profits. Third, we apply our tests to a wide range of trading strategies based on stock momentum, stock value, stock liquidity, and industry momentum. Over 50% of these strategies are found to violate market efficiency. We also identify dominant trading strategies which converge to arbitrage most rapidly.

Global style momentum

Abstract We first document the empirical regularity of significant style-level momentum returns in international data. Then we test some Barberis and Shleifer (2003) propositions regarding style momentum. One proposition holds that Sharpe ratios from style-level momentum strategies should be at least as large as stock-level momentum Sharpe ratios. We test for style-level momentum profitability in our sample of global markets and find some evidence of larger style momentum Sharpe ratios, especially within the value-growth style. However, most of the evidence favors stock momentum. The Barberis and Shleifer (2003) model also suggests that style momentum could be time-varying. Variables that effectively condition stock momentum are much less effective with style momentum.

Dynamic Trading and Asset Prices: Keynes vs. Hayek

We investigate the dynamics of prices, information, and expectations in a competitive, noisy, dynamic asset pricing equilibrium model with long-term investors. We argue that the fact that prices can score worse or better than consensus opinion in predicting the fundamentals is a product of endogenous short-term speculation. For a given positive level of residual pay-off uncertainty, if liquidity trades display low persistence, rational investors act like market makers and accommodate the order flow and prices are farther away from fundamentals compared to consensus. This defines a “Keynesian” region; the complementary region is “Hayekian” in that rational investors chase the trend and prices are systematically closer to fundamentals than average expectations. The standard case of no residual uncertainty and liquidity trading following a random walk is on the frontier of the two regions and identifies the set of deep parameters for which rational investors abide by Keynes' dictum of concentrating on an asset “long-term prospects and those only”. The analysis also explains momentum and reversal in stock returns and how accommodation and trend-chasing strategies differ from these phenomena.

Information Management in Financial Markets: Implications for Stock Momentum and Volatility

Using a dataset of over half a million corporate press-releases, I study patterns of private information disclosures by the top U.S. public companies. I find that the amount of positive information released by a company is positively related to both its future stock performance and future positive releases, suggesting that companies tend to ration the delivery of positive news and create sustainable price trends. This effect is stronger for firms with lower information transparency. The segmentation of positive information contributes significantly to the Jegadeesh and Titman momentum effect among winner stocks. At the same time, private information disclosures are negatively related to the arrival of public information, supporting the hypothesis that private information releases are timed to mitigate public information shocks. Accordingly, I find that stock volatility is significantly lower for firms that use reserves of positive private information as insurance against unanticipated negative events.

Momentum change, industry group rotation and portfolio returns

Prior research on momentum investing shows that over the intermediate term (3–12 months) stocks that outperform (underperform) in a previous time period continue to do so in a subsequent time period. It has also been demonstrated that similar results apply to sectors or industries. Evidence suggests that industry momentum effect is distinct from stock momentum, especially for large capitalization stocks. Accordingly, exploiting industry momentum can be an expedient way of asset allocation among sectors or industries. In this article, we propose an adjustment of momentum investing. We explore momentum change as a basis of portfolio selection. Considering long positions only, we show that the strategy produces significantly higher absolute and risk-adjusted returns when applied to the Standard and Poor's industry indices (1971–1997) relative to the simple momentum strategy of buying winners. A dummy variable regression is used to validate the results.

How Smart is the 'Smart Money'? Evidence from Corporate Bond Mutual Funds

We examine the “smart money” hypothesis - the ability of mutual fund investors to select funds realizing superior future returns - using a sample of corporate bond funds over the period of 1991-2009. While Sapp and Tiwari (2004) attribute the smart money documented for equity mutual funds to the stock momentum effect, prior research finds no momentum effect in corporate bonds. In such a setting free of return momentum, we still find evidence of smart money. After evaluating alternative explanations for the smart money, we conclude that fund investors are smart largely to the extent that they chase past fund performance, rather than using superior information to predict fund performance.

Can Large Pension Funds Beat the Market? Asset Allocation, Market Timing, Security Selection and the Limits of Liquidity

We analyze the three components of active management (asset allocation, market timing and security selection) in the net performance of U.S. pension funds and relate these to fund size and the liquidity of the investments. On average, the funds in our sample have an annual net alpha of 89 basis points that is evenly distributed across the asset allocation, market timing, and security selection components. Stock momentum fully explains the positive alpha in security selection, whereas “time series momentum” drives market timing. While larger pension funds have lower investment costs, this does not lead to better net performance. Rather, all three components of active management exhibit substantial diseconomies of scale directly related to illiquidity. Our results suggest that especially the larger pension funds would have done better if they invested more in passive mandates without frequent rebalancing across asset classes.

How can defined contribution pension plans benefit from momentum and mean reversion?

In this paper, we assess whether the stock market downturn can be an opportunity for Defined Contribution pension plan members to reinforce their risky assets exposure? In line with the framework developed by Kojein et al. (Manag Sci 55(7):1199–1213, 2009), we consider a DC plan investor, during the accumulation phase, whose aim is to maximize his terminal wealth. Within a continuous portfolio choice model, in which stock returns exhibit both momentum and mean reversion, DC plan members are allowed to invest their pension wealth into stocks as well as cash and bond assets. We derived the optimal portfolio candidate and we show how a DC plan investor can benefit from market opportunities by taking advantage of the momentum and mean reversion stock return properties. We find that long term investors such as DC plan members would benefit from a temporary increase of the share of risky assets in their portfolio in preparation of their retirement.

Short‐term momentum patterns in stock and sectoral returns: evidence from India

PurposeThe purpose of this paper is to evaluate if there are any momentum patterns in stock and sectoral returns and if they can be explained by the risk factors.Design/methodology/approachThe methodology involves portfolio generation based on company characteristics and short‐term prior return (six to 12 months). The characteristic‐sorted portfolios are then regressed on risk factors using one‐factor (CAPM) and multi‐factor model (Fama French model and four‐factor model involving three Fama French factors and an additional sectoral momentum factor).FindingsThe authors find momentum profits in Indian context for prior return portfolios which are stronger for 6‐6 compared to 12‐12 strategies. These momentum profits are larger for some characteristic‐sorted portfolios. Risk models such as CAPM and Fama French model fail to capture momentum profits. In fact, winner portfolios generally comprise large firm and high P/B stocks, thus defying the risk story. Some zero investment momentum‐based trading strategies do provide significant payoffs. The authors also observe momentum profits in sectoral returns. A part of stock momentum profits is captured by sectoral factor, thus implying that it may mainly be an outcome of sectoral momentum.Research limitations/implicationsThe findings are pertinent for portfolio managers and investment analysts who are continuously in pursuit of trading strategies that provide extra normal returns. From an academic point of view, the authors suggest that sectoral factor should be used in the multi‐factor framework for explaining asset returns.Originality/valueThe study contributes to the asset pricing and behavioral literature from emerging markets.

How Much Does It Pay to Be Socially Responsible?

How much does it pay to be socially responsible? In order to answer this question, we combined two components from two different streams of business scholarship. We employed the KLD SOCRATES Social Ratings database as our measure of corporate social performance (CSP), and we applied Carhart’s four-factor model, a standard extension of the Fama-French 3-factor model in the field of finance, to quantify the relationship between CSP and financial performance. Our results show that, for large US corporations belonging to the S&P 500 Index, the stocks of companies in the top CSP quantile outperform those of companies in the bottom CSP quantile by as much as 6.24 percentage points annually for years 1991 through 2006, after adjusting for standard risk factors such as market risk, size, book to market ratio, and stock momentum. For a company in the S&P 500 Index with average market capitalization, this translates to $1.28 billion in additional shareholder wealth.

Characteristic-Based Covariances and Cross-Sectional Expected Returns

I suggest a characteristic-based covariance model that directly links the predetermined fi rm characteristics to time-varying covariance risk. Using a large cross section of individual stock-level data, I parsimoniously estimate both conditional expected returns and conditional covariances as functions of fi rm characteristics. I fi nd a strong and positive intertemporal risk-return relation on individual stocks. In comparison to the Fama-French three-factor model, the characteristic-based covariance model substantially reduces the pricing errors of characteristic-sorted portfolios on size, book-to-market, accruals, asset growth, investment-to-assets, return-on-assets, net stock issues, financial distress, and momentum. Portfolio tests similar to Daniel and Titman (1997) suggest that firm characteristics, mainly through the characteristic-based covariance structure of returns, appear to explain the cross section of average stock returns.