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Acceleration Stock Momentum Strategy

August 22, 2017 • Posted in Momentum Investing

Does incorporation of stock price acceleration boost the performance of a conventional momentum strategy? In their July 2017 paper entitled “Evolution of Historical Prices in Momentum Investing”, Li-Wen Chen, Hsin-Yi Yu and Wen-Kai Wang examine whether stock price acceleration adds value to a conventional momentum strategy among U.S. stocks by identifying the best winners and the worst losers. They focus on a stock ranking interval of 12 months and a portfolio holding interval of six months, with a skip-month between. Specifically, they each month:

  • Rank stocks into fifths (quintiles) based on past 12-month returns. The top (bottom) quintile holds winners (losers).
  • Fit daily time series prices over the same past 12 months for each stock to a quadratic equation and re-rank stocks within past return quintiles by the coefficient of the quadratic term, resulting in 25 portfolios sorted by past return and quadratic coefficient. A positive (negative) coefficient means that price is accelerating up (down).
  • Skip one month.
  • Compare three value-weighted hedge portfolios held over the next six months to highlight the incremental effect of the quadratic coefficient on conventional momentum:
    1. Conventional: buy winners and sell losers.
    2. Acceleration: buy accelerating winners and sell accelerating losers.
    3. Deceleration: buy decelerating winners and sell decelerating losers.

The monthly return for each strategy is the average return for its six overlapping portfolios. Using daily and monthly returns, characteristics and accounting data for a broad sample of U.S. common stocks with price at least $5 during January 1962 through December 2014, they find that:

(more…)

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