Do financial market prices reliably exhibit momentum? If so, why, and how can traders best exploit it? These blog entries relate to momentum investing/trading.
October 1, 2015 - Calendar Effects, Fundamental Valuation, Momentum Investing
We have updated the the monthly asset class ETF value strategy weights and associated performance data at Value Strategy.
September 30, 2015 - Calendar Effects, Fundamental Valuation, Momentum Investing
We have updated the the monthly asset class ETF momentum winners and associated performance data at Momentum Strategy.
We have updated the Trading Calendar to incorporate data for September 2015.
September 30, 2015 - Momentum Investing, Strategic Allocation
The home page and “Momentum Strategy” now show preliminary asset class ETF momentum strategy positions for October 2015. The difference in past returns between third and fourth places is large, so the top three are very unlikely to change by the close.
Risk-averse investors following the strategy may want to consider the findings in “SACEMS with Three Copies of Cash”.
September 21, 2015 - Momentum Investing, Size Effect
Are there exploitable size and momentum effects among international stocks? In their August 2015 paper entitled “Size and Momentum Profitability in International Stock Markets”, Peter Schmidt, Urs Von Arx, Andreas Schrimpf, Alexander Wagner and Andreas Ziegler examine the size effect and the interplay between size and momentum strategies via long-short stock portfolios in 23 countries. They measure stock size as market capitalization and consider several ways of measuring the difference in average returns and four-factor (market, size, book-to-market, momentum) alphas between value-weighted portfolios of small stocks and big stocks. They measure stock momentum as return from 12 months ago to one month ago, with a skip-month between ranking and value-weighted portfolio formation. They assess net portfolio performance in three ways: (1) imposing estimated trading frictions (0.3%-0.4% for small stocks and 0.15% for big stocks); (2) calculating the maximum trading frictions an investor could bear; and, (3) calculating U.S. dollar trading volume for each portfolio. Using stock data for the U.S. during 1985 through 2012 and for 22 other countries mostly during 1991 through 2012, they find that: Keep Reading
September 17, 2015 - Momentum Investing
Does a stock momentum strategy selecting only persistent winners and losers work better than a conventional strategy that includes one-month wonders? In their August 2015 paper entitled “Persistency of the Momentum Effect: The Role of Consistent Winners and Losers”, Hong-Yi Chen, Pin-Huang Chou and Chia-Hsun Hsieh examine stock momentum persistence as a condition for momentum portfolio construction. They define the momentum of a stock as persistent if it appears in the top or bottom tenth (decile) of ranking interval returns for at least two consecutive months. They determine what kinds of stocks tend to exhibit momentum persistence. They also investigate whether restricting momentum portfolios to persistent winners and losers improves performance compared to a conventional momentum portfolio. While considering several ranking intervals, they focus on six months. Using firm accounting information (lagged at least six months), stock trading data and quarterly institutional holdings for a broad sample of U.S. common stocks during 1980 through 2011, they find that: Keep Reading
September 3, 2015 - Momentum Investing, Volatility Effects
What indicator works best to mitigate stock momentum strategy crashes? In his March 2015 paper entitled “Momentum Crash Management”, Mahdi Heidari compares performances of seven indicators for avoiding conventional stock momentum strategy crashes: (1) prior-month market return; (2) change in prior-month market return: (3) market volatility (standard deviation of 52 weekly returns); (4) dispersion (variance) of daily returns across all stocks; (5) market illiquidity (aggregate impact of trading on price); (6) momentum volatility (standard deviation of momentum strategy returns the past six months); and, (7) change in momentum volatility. The conventional strategy is each month long (short) the value-weighted tenth of stocks with the highest (lowest) returns from 12 months ago to one month ago. For each of the competing indicators, he invests in the conventional momentum strategy (cash) when the indicator is below (within) the top 10% of its values over the past five years. He uses portfolio turnover to compare implementation costs. Using data for a broad sample of relatively liquid U.S. stocks during January 1926 through December 2013, he finds that: Keep Reading
August 24, 2015 - Momentum Investing, Strategic Allocation
Subscribers have expressed concern about selecting assets with negative past returns for versions of the “Simple Asset Class ETF Momentum Strategy” (SACEMS) that hold the equally weighted (EW) Top 2 or EW Top 3 exchange-traded funds (ETF). To test this concern, we expand the universe of ETFs/Cash by adding two copies of Cash, as follows:
PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 1000 Index (IWB)
iShares Russell 2000 Index (IWM)
SPDR Dow Jones REIT (RWR)
iShares Barclays 20+ Year Treasury Bond (TLT)
3-month Treasury bills (Cash)
3-month Treasury bills (Cash)
3-month Treasury bills (Cash)
For this universe, if all assets other than Cash have negative total returns over the past five months, the EW Top 2 and EW Top 3 portfolios select only Cash. Using monthly dividend adjusted closing prices for the asset class proxies and the yield for Cash over the period February 2006 (the earliest all ETFs are available) through July 2015 (114 months), we find that: Keep Reading
August 7, 2015 - Calendar Effects, Momentum Investing
Can investors refine and exploit the upward bias of overnight stock returns? In the July 2015 version of her paper entitled “Night Trading: Lower Risk but Higher Returns?”, Marie-Eve Lachance presents a way of sorting stocks by strength of overnight return bias and investigates gross and net profitability of associated overnight-only investment strategies. Specifically, she each month regresses daily overnight returns on total returns over the past year to measure an Overnight Bias Parameter (OBP) for each stock. She then forms portfolios based on monthly OBP sorts, focusing on the portfolio of stocks with significantly positive OBPs. She estimates trading frictions by: (1) assuming market-on-open and market-on-close trades, avoiding bid-ask spreads; and, (2) estimating broker charges from the lowest fees available in the U.S. in 2014. Using daily overnight (close-to-open) and intraday (open-to-close) total returns, trading data and characteristics for a broad sample of reasonably liquid U.S. stocks during 1995 through 2014, she finds that: Keep Reading
July 31, 2015 - Momentum Investing, Value Premium
Do dual-sorts of country stock market predictive factors add value to single-sorts? In the July 2015 version of his paper entitled “Combining Equity Country Selection Strategies” Adam Zaremba first re-examines earnings-price ratio (E/P), momentum (return from 12 months ago to one month ago), skewness (based on the last 24 monthly returns) and turnover ratio (average monthly turnover for the past 12 months) as country stock market predictive factors. He then investigates whether combined sorts on two factors outperform single-factor sorts. For each individual factor, he sorts country stock markets into fifths (quintiles) and measures the factor premium as the difference in returns between the highest and lowest quintiles. He focuses on market capitalization weighting within quintiles but considers equal and liquidity (average turnover) weighting schemes as robustness checks. For dual sorts, he computes combined ranking as the average of component factor rankings and then forms quintile portfolios. Using monthly total returns adjusted for local dividend tax rates in U.S. dollars for 78 existing and discontinued country stock indexes (primarily MSCI) during 1999 through March 2015, he finds that: Keep Reading
July 22, 2015 - Momentum Investing, Value Premium, Volatility Effects
Has (hypothetical) equity factor investing worked as well in recent years as indicated in past studies? In his July 2015 paper entitled “Factor Investing Revisited”, David Blitz updates his prior study quantifying the performance of allocations to U.S. stocks based on three factor premiums: (1) value (high book-to-market ratio); (2) momentum (high return from 12 months ago to one month ago); and, (3) low-volatility (low standard deviation of total returns over the last 36 months). He considers two additional factor allocations: (4) operating profitability (high return on equity); and, (5) investment (low asset growth). He specifies each factor portfolio as the 30% of U.S. stocks with market capitalizations above the NYSE median that have the highest expected returns, reformed monthly for momentum and low-volatility and annually for the other factors. He considers both equal-weighted and value-weighted portfolios for each factor. He also summarizes recent research on the role of small-capitalization stocks, factor timing, long-only versus long-short portfolios, applicability to international stocks and applicability to other asset classes. Using value, momentum, profitability and investment factor portfolio returns from Kenneth French’s library and low-volatility portfolio returns as constructed from a broad sample of U.S. stocks during July 1963 through December 2014, he finds that: Keep Reading