Is there return momentum?

Question 1

Lesmond, Schill and Zhou 2004

Answer 1

• AGAINST MOM
• Our paper re-examines the profitability of relative strength or momentum trading strategies (buying past strong performers and selling past weak performers).
• We find that standard relative strength strategies require frequent trading in disproportionately high cost securities such that trading costs prevent profitable strategy execution.
• In the cross-section, we find that those stocks that generate large momentum returns are precisely those stocks with high trading costs.

Question 2

Sapp and Tiwari 2004

Answer 2

• FOR MOM
• We examine the finding that investors are able to predict mutual fund performance and invest accordingly.
• We show that the smart money effect is explained by the stock return momentum phenomenon documented by Jegadeesh and Titman (1993).
• Further evidence suggests investors do not select funds based on a momentum investing style, but rather simply chase funds that were recent winners.

Question 3

Avramov, Chordia, Jostova and Philipov 2007

Answer 3

• Against MOM
• This paper establishes a robust link between momentum and credit rating.
• Momentum profitability is large and significant among low-grade firms, but it is nonexistent among high-grade firms.
• The momentum payoffs documented in the literature are generated by low-grade firms that account for less than 4% of the overall market capitalization of rated firms.

Question 4

Fama and French 2008

Answer 4

• B/M AND SIZE CAN’T EXPLAIN MOM
• The anomalous returns associated with net stock issues, accruals, and momentum are pervasive; they show up in all size groups (micro, small, and big) in cross-section regressions, and they are also strong in sorts, at least in the extremes.
• The asset growth and profitability anomalies are less robust.
• There is an asset growth anomaly in average returns on microcaps and small stocks, but it is absent for big stocks.
• Among profitable firms, higher profitability tends to be associated with abnormally high returns, but there is little evidence that unprofitable firms have unusually low returns.