Evidence Investing

 
 
More evidence on momentum:

#5:  “Momentum Profits, Non-Normality Risks and the Business Cycle” from Applied Financial Economics.

Abstract:      It shows that momentum profits are not normally distributed and, relatedly, that the momentum profitability is partly a compensation for systematic negative skewness (the distribution curve tilts to the right…toward abnormal profits) risk in line with market efficiency. This finding is pervasive across nine trading strategies that combine different holding and ranking periods and is reinforced when time dependencies in abnormal returns and risks are explicitly modeled. The analysis also reveals that the market and skewness risks of momentum portfolios evolve…in a manner that is consistent with market timing and risk aversion. While non-normality risks matter, a large proportion of the momentum profits remains unexplained…

First look at this chart (courtesy of CXO Advisory):
Picture
Some salient points from the paper:

All of the nine momentum strategies they examined showed significant abnormal performance advantages for past winners.  Standard deviation is also smaller for past winners (those stocks with momentum) than with past losers. Efficient market theory still cannot explain fully the outperformance of momentum investing…meaning there is something there (with momentum)!



#6:  In a working paper from the Ross School of Business entitled “Momentum Profits, Factor Pricing, and Macroeconomic Risk,” we see:

Abstract:      We study the connection between momentum portfolio returns and shifts in factor loadings on the growth rate of industrial production. Winners have temporarily higher loadings than losers. The loading spread derives mostly from the high, positive loadings of winners. Small stocks have higher loadings than big stocks, and value stocks have higher loadings than growth stocks. Using standard multifactor tests, we present evidence that the growth rate of industrial production is a priced risk factor. In most of our tests, however, the combined effect of factor pricing and risk shifts does not explain a large fraction of momentum returns.


In this paper, they again constructed momentum portfolios using 6 month rankings and 6 month hold periods (more on this lingo soon).  They found:

The average winner-minus-loser shows excess return is 0.85% per month.  Also, winners have temporarily higher average future growth rates of dividends, capital investment and sales than losers and these temporary factors generally match the duration of their momentum effect.
 


Comments

cheap jordan for sale link
04/29/2011 00:33

In your life, there will at least one time that you forget yourself for someone, asking for no result, no company, no ownership nor love. Jus task for meeting you in my most beautiful years.

Reply
doctor dre beats link
04/29/2011 00:46

Thanks to America, and only thanks to America, the world has enjoyed these past decades an age of hitherto unimagined freedom and opportunity.

Reply



Leave a Reply