Understanding the Nature of the Risks and the Source of the Rewards to Momentum Investing

Short-Term Momentum Effect: a Case of Middle East Stock Markets

“…In CAPM, it will be examined that whether momentum profits have been explained by CAPM or not? Many well known authors, for instance, Fama and French (1996), Grundy and Martin (2001), Jegadeesh and Titman (2001), Conrad and Kaul (1998), Moskowitz and Grinblatt (1999) have used CAPM as risk based standard model to explain the profits from momentum investment strategy. But CAPM never fully explained the short term momentum effect.…”

“…Several authors have tried to explain returns of short term momentum effect but they found that CAPM could not explain the momentum effect. Griffin et al (2003), Grundy and Martin (2001), Jegadeesh and Titman (1993) and Naranjo and Porter (2004) have used CAPM including other risk based models to explain momentum profits but they were unable to explain momentum.…”

Momentum trading, mean reversal and overreaction in Chinese stock market

“…They demonstrate that a momentum strategy of sorting firms by their previous returns over the past 6-9 months and holding those with the best prior performance and short selling those with the worst prior performance generates an excess return of about one percent per month for U.S. stocks. This finding has motivated numerous researchers to study momentum in other markets and/or other sample periods, including Jegadeesh and Titman (2001), Rouwenhorst (1998), Chan, Hameed and Tong (2000), Grundy and Martin (2001), Griffin, Ji and Martin ((2003)), and Patro and Wu (2004), among many others. On the other hand, another strand of literature documents that equity returns are negatively serially correlated and stock prices have a tendency to revert to their trend lines over the long horizons.…”

Stock Market Integration, Return Forecastability and Implications for Market Efficiency: A Panel Study

“…This allows us to assess transaction costs, which are likely to be substantial for monthly switching. Carhart (1997) points out for instance that for mutual funds following momentum investment strategies the excess returns disappear when transactions costs are considered; Grundy and Martin (2001) conclude similarly for U.S. equities. In the cases of Max3 and Max3-Min3 we count each switch of one of the three or six country indices for 1 / 3 and 1 / 6 of a switch, respectively.…”

“…At a cost per switch of 2% the resulting transactions costs of 5.3% would offset nearly half of the excess return of 11.9%. Note by the way that, as Grundy and Martin (2001) point out, establishing that one cannot profit from momentum does not imply that momentum disappears; it is still a feature of financial markets.…”