Reversal, Momentum, Reversion and 12-month Echo Dependencies on January Returns
February 8, 2011 - Calendar Effects, Momentum Investing
Are January returns important to the profitability of short-term reversal, intermediate-term momentum, long-term reversion and 12-month echo trading strategies? In her December 2010 paper entitled “Momentum, Seasonality and January”, Yaqiong Yao investigates the role of January returns within these previously discovered anomalies. The study’s core methodology is to reform equally weighted hedge portfolios each month that are long/short stocks in extreme tenths (deciles) of past returns over various intervals. The one-month reversal strategy is long (short) losers (winners) based on prior month returns. Momentum strategies are long (short) winners (losers) based on past 11-month or 12-month returns, with a skip month before portfolio formation to avoid short-term reversal. The reversion strategy is long (short) losers (winners) based on past four-year returns, with a skip-year before portfolio formation to avoid intermediate-term momentum. The 12-month echo strategy is long (short) winners (losers) based on returns for the same month the prior one, two or three years. Using monthly returns for a broad sample of NYSE/AMEX stocks during 1926 through 2009, she finds that: Keep Reading