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Absolute Strength: Exploring Momentum in Stock Returns Analysis

Last Updated on 10 February, 2024 by Rejaul Karim

The study “Absolute Strength: Exploring Momentum in Stock Returns” by Huseyin Gulen and Ralitsa Petkova examines a previously undocumented pattern in stock returns, termed “absolute strength momentum.” This phenomenon reveals that stocks exhibiting significant increases in value (absolute strength winners) maintain their upward trajectory, while stocks experiencing substantial decreases in value (absolute strength losers) continue to decline in the short term.

By establishing a historical distribution of realized cumulative returns, the researchers determine stable breakpoints for winner and loser portfolios. Absolute strength momentum is found to produce substantial risk-adjusted returns, outperforming the relative strength momentum strategy presented by Jegadeesh and Titman (1993) as well as other notable momentum strategies.

Furthermore, the paper establishes the consistency of absolute strength momentum’s profitability across diverse sample periods, international markets, asset classes, and holding periods.

Abstract Of Paper

We document a new pattern in stock returns that we call absolute strength momentum. Stocks that have signifi cantly increased in value in the recent past (absolute strength winners) continue to gain, and stocks that have signifi cantly decreased in value (absolute strength losers) continue to lose in the near future. Absolute strength winner and loser portfolio breakpoints are recursively determined by the historical distribution of realized cumulative returns across time and across stocks. The historical distribution yields stable breakpoints that are always positive (negative) for the winner (loser) portfolios. As a result, winners are those that have experienced a signifi cant upward trend, while losers are those that have experienced a signifi cant downward trend, and stocks with no momentum have cumulative returns that are not signi ficantly different from zero. Absolute strength momentum generates large and signi ficant risk-adjusted returns, outperforms the relative strength momentum strategy of Jegadeesh and Titman (1993) and other prominent momentum strategies, and its profi tability is consistent across sample periods, international markets, asset classes, and holding periods.

Original paper – Download PDF

Here you can download the PDF and original paper of Absolute Strength: Exploring Momentum in Stock Returns.

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Author

Huseyin Gulen
Purdue University – Krannert School of Management

Ralitsa Petkova
Case Western Reserve University – Department of Banking & Finance

Conclusion

In conclusion, the research paper “Absolute Strength: Exploring Momentum in Stock Returns” by Huseyin Gulen and Ralitsa Petkova sheds light on a new pattern in stock returns known as “absolute strength momentum.”

By determining stable breakpoints for absolute strength winner and loser portfolios, the study demonstrates the powerful potential of this novel approach. Absolute strength momentum has been found to generate significant risk-adjusted returns, outpacing the performance of the widely recognized relative strength momentum strategy of Jegadeesh and Titman (1993), as well as other established momentum strategies.

Furthermore, the research emphasizes the robustness of absolute strength momentum’s profitability, which remains consistent across various sample periods, international markets, asset classes, and holding periods. These findings contribute valuable insights to the field of momentum investing and offer a fresh perspective for investors seeking to enhance their portfolio returns.

Related Reading:

Industry Momentum: The Role of Time-Varying Factor Exposures and Market Conditions

High Accruals Momentum

FAQ

Q1: What is the main focus of the research paper by Huseyin Gulen and Ralitsa Petkova?

The research paper explores a previously undocumented pattern in stock returns termed “absolute strength momentum.” It investigates how stocks that have significantly increased or decreased in value in the recent past continue to exhibit momentum, leading to substantial risk-adjusted returns.

Q2: How is absolute strength momentum defined, and what are its key findings?

Absolute strength momentum refers to the phenomenon where stocks that have experienced significant increases in value (absolute strength winners) continue to gain, while those with substantial decreases in value (absolute strength losers) continue to decline in the short term. The paper establishes stable breakpoints for winner and loser portfolios based on the historical distribution of realized cumulative returns, demonstrating the profitability and consistency of this momentum strategy.

Q3: How does absolute strength momentum compare to other momentum strategies?

The research findings indicate that absolute strength momentum outperforms the relative strength momentum strategy presented by Jegadeesh and Titman (1993) and other notable momentum strategies. It generates large and significant risk-adjusted returns, contributing a unique perspective to the understanding of momentum in stock returns.

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