ABSTRACTAlthough there is broad consensus on a robust momentum effect in Australia, the interaction between momentum and capital structure has been underexplored in the literature. This paper explicitly examines whether capital structure promotes momentum trading in the Australian stock market. The data sample includes over 1800 stocks listed on the Australian Stock Exchange from 2000 to 2023. We construct momentum portfolios using the monthly rolling and overlapping techniques. Two ratios are calculated to measure the firms’ capital structure: the book‐value and market‐value financial leverages. Irrespective of the capital structure measure, the superior returns of the Winner quintile are concentrated in highly leveraged stocks. In contrast, the high‐leverage Loser performs worst among the Loser quintile. The return of momentum strategy enhanced with capital structure is more than 1.5 times the original momentum profit. The risk‐adjusted analysis paints a similar return pattern. Additionally, we observe high volatility in earnings and cash flows for highly leveraged stocks, leading to significant mispricing. Thus, the interaction between momentum and capital structure may stem from increased misvaluation, consistent with a behavioral explanation.

Abstract We document significant time-series and cross-sectional momentum in 28 equity option factors. Factor momentum is distinct from a static factor portfolio, and prominent option factor models cannot fully explain its returns. Despite high autocorrelation, factor momentum profits are mainly driven by high and persistently different mean factor returns in the case of longer formation periods. Option factor momentum fully subsumes option momentum, but not vice versa. Our findings are robust over time, across various market states, and for alternative momentum strategy constructions.

Decomposing momentum: The forgotten component

Purpose In the present study, we investigate whether enhanced momentum strategies outperform price momentum strategies and if they show greater resilience and stability under adverse market conditions. We also examine if such strategies are explained by prominent asset pricing models or are a result of behavioral mispricing. Design/methodology/approach Data consist of the equity shares of all companies listed on National Stock Exchange over the study period. To check the efficacy of enhanced momentum over price momentum, six momentum strategies have been designed and their raw as well as risk-adjusted returns using multi-factor models have been observed. Behavioral mispricing has been examined by constructing an investor attention index. Finally, few robustness tests have been performed to confirm the results. Findings We find that an enhanced momentum strategy which combines relative and absolute strength momentum outperforms conventional price momentum strategy in India. We also demonstrate that rational pricing models are not able to explain momentum profits for any of the strategies. Finally, we observe that investor overreaction is the possible explanation of momentum profits in India. Thus, our results confirm the role of behavioral mispricing in explaining momentum returns. Originality/value Our research is the first major attempt to study enhanced momentum strategies in the Indian context. We experiment with several new enhanced momentum strategies which have not been explored in prior literature. The findings have strong implications for global portfolio managers who wish to design profitable trading strategies.

Nominal price illusion, return skewness, and momentum

The momentum effect is postulated to be a consequence of the disposition effect, which in turn, is a result of the interplay between the typically dominant diminishing sensitivity feature of prospect theory and the loss aversion feature. However, studies have shown that older individuals can exhibit a reverse disposition effect due to their heightened loss aversion compared to younger individuals. This paper hypothesizes that as the population ages, the disposition effect of the average investor starts to diminish, thereby inducing a corresponding weakening of the momentum effect. We find empirical evidence showing that the long-horizon momentum profits are negatively related to changes in the proportion of the older population.

Frog in the Pan and the market-state effect on momentum

Domestic investors may use iShares country ETFs to exploit the momentum profit across country portfolios. This paper examines the price momentum on 15 well-diversified iShares country ETFs for developed markets from April 1996 to September 2023. We find statistically and economically significant profits for some momentum strategies: long past winners and short past losers. The results are robust to excessive risks. Thus, investors may seek outperformance by implementing momentum strategies on iShares country ETFs.

Abstract Momentum stocks are exposed to aggregate volatility risk. This paper estimates an exponential generalized autoregressive conditional heteroskedastic model of market volatility to introduce a new volatility risk factor. Winners have negative loadings on this factor, whereas losers have positive loadings. Because volatility risk carries a negative price of risk, the new factor explains 73% of momentum profits. The paper rationalizes the volatility risks of momentum portfolios using growth option arguments and explains why momentum profits are short‐lived, depend on market states, and concentrate among firms with high idiosyncratic volatility. Results are robust to controlling for other risk factors and using alternative estimation procedures.

Revisiting time series momentum in China's commodity futures market: Evidence on sources of momentum profits

Momentum, reversals and liquidity: Indian evidence

Abstract Momentum profits depend mainly on the short leg and therefore on barriers to short sales. Our research indicates that the decline in momentum profitability in the past 2 decades is driven partly by a contemporaneous growth in stock options trading. Stock options offer an alternative to short selling, augmenting the stock lending market, and thereby contributing to improved pricing efficiency. The resulting reduction in barriers to short sales contributes to lower returns to momentum trading from the short leg. Our results persist after matching stocks with and without options based on different firm-level characteristics.

Purpose: This paper aims to examine the impact of price movements in 52-week highs on a 52-week high momentum strategy. This study refers to the upward or downward movement in 52- week highs as an updating effect and determines how this effect influences the profitability of the original 52-week high momentum strategy. Design/methodology/approach: This paper decomposes the ratio of stock price to 52-week high into denoted two components: price change and updating components. We construct two momentum strategies, each focusing on adjusting either the price change or the updating component. Additionally, we employ a portfolio approach and Fama-MacBeth regression analysis to investigate the profitability of each proposed momentum strategy. Findings: The empirical results reveal that removing the price change component (updating component) from the original 52-week high measure can increases (decreases) the momentum profit, implying that the updating component dominates the price change component. Moreover, our analysis shows that when a high ratio of stock price to 52-week high is driven by a downward updating event, the subsequent positive momentum for a winner portfolio is more substantial. Research limitations/implications: This paper investigates the influence of 52-week highs movement on momentum strategies, utilizing data from Taiwan stock market. The findings reveal that accounting for the updating effect of 52-week highs can enhance the profitability of the original momentum strategy. However, it is important to note that this conclusion is currently limited to relatively inefficient stock markets. The impact on relatively efficient markets remains an area that requires further research for a comprehensive understanding. Originality/value: The finance literature widely acknowledges the 52-week high price as a reference point that can impact investors' trading psychology. Numerous empirical studies have confirmed the profitability of the 52-week high momentum investing strategy. However, these studies have not thoroughly explored the implications and effects of price movements within the scope of a 52-week high momentum strategy. Taking behavioral perspectives into account, this paper considers that the updating of 52-week high prices can influence investors' attention and subsequently impact the profitability of the momentum strategy.

Abstract We uncover a link between momentum and overvaluation: assets that generate strong momentum profits have lower risk-adjusted unconditional returns; conversely, trading momentum within overvalued assets doubles the profit of the standard momentum strategy. We compute the profits of a momentum strategy within various portfolios; portfolios within which momentum is profitable are defined as momentum trading opportunity (MTO). High-MTO assets have negative unconditional alphas and concentrate in the short legs of most anomalies; controlling for MTO reduces anomaly alphas by up to half. These results imply that the existence of other anomalies is closely linked to the existence of momentum and they should be studied jointly.

Cross-stock momentum builds on the asymmetry in lead-lag linkages and the difference between long-run and short-run contemporaneous co-movements. Data-driven cross-stock linkages generate a monthly alpha of 1.62% (t-stat=10.03). The asymmetry distinguishes cross-stock momentum from factor momentum, and industry momentum is not subsumed by factor momentum. Factor momentum profit is mostly due to the high cross-stock links. The data-driven linkages vary faster over time than those in previous studies because short-run co-movements incorporate persistent linkages.

Foreign institutions, local investors and momentum trading

Mechanisms of overpricing: An investigation on momentum crashes

In this paper, unexpected market excess returns are decomposed into permanent cash-flow news, temporary cash-flow news, and discount-rate news by using a log-linear SVAR model, and the profitability of momentum strategies is analyzed under these news states. The empirical results are as follow. Frist, Momentum returns exist in the US stock market. Second, momentum profitability exists under both permanent and temporary cash-flow news states. This supports the results of Celiker et al. (2016) that momentum profitability exists in the US stock market under cash flow news states. Third, the momentum effect is strong even under the discount-rate news. Finally, Momentum profitability is stronger when the overall market is in an up market. In other words, when the market is up, investors tend to be overconfident, which creates momentums. This paper can analyze which factors play an important role in determining momentum returns by estimating permanent and temporary cash-flow news and discount-rate news by using the developed news decomposition method.

Revisiting the momentum effect in Taiwan: The role of persistency

Price behavior of small-cap stocks and momentum: A study using principal component momentum