Short-term and Long-term Market Momentum
Posted in Momentum Investing
September 4, 2013
Does combining past return rankings at long (multi-year) and short (3-12 months) intervals offer a means of boosting momentum strategy returns? In their August 2013 paper entitled “Price Momentum Components: Evidence from International Market Indices”, Graham Bornholt and Mirela Malin compare strategies based on the interplay of short-term continuation and long-term reversal as applied to country stock market indexes. They define short-term as 3, 6, 9 or 12 months (focusing on 6 months). They define long-term as 36, 48 or 60 months. They consider three kinds of momentum strategies:
- Traditional – each month, buy (sell) the fourth of country market indexes with the highest (lowest) short-term past returns.
- Early-stage – each month, first identify the fourth of country markets that are short-term winners and the fourth that are short-term losers. Then buy (sell) the half of these winners (losers) with the lowest (highest) long-term returns, thereby focusing on indexes with recent price reversals.
- Late-stage – each month, first identify the fourth of country markets that are short-term winners and the fourth that are short-term losers. Then buy (sell) the half of these winners (losers) with the highest (lowest) long-term returns, thereby focusing on indexes with consistent price continuation.
They weight selected indexes equally. They consider short-term holding intervals of 1, 3, 6, 9 or 12 months (with overlapping portfolios when longer than a month) and a long-term holding interval of five years. When calculating monthly returns, they insert a skip-month between the ranking and holding intervals and use a simple (equally weighted) average of returns for any active overlapping portfolios. When examining long-term performance, they do not insert a skip-month and use average returns for each month after portfolio formation. Using monthly total returns in U.S. dollars for 18 developed and 26 emerging country stock market indexes as available during January 1970 through April 2013 (220 to 520 observations per market), they find that: (more…)