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Do Style Momentum Strategies Produce Abnormal Returns: Evidence from Index Investing

Last Updated on 10 February, 2024 by Rejaul Karim

The paper “Do Style Momentum Strategies Produce Abnormal Returns: Evidence from Index Investing” by Zugang Liu and Jia Wang investigates the return enhancement ability of style momentum strategy.

The strategy switches between value and growth styles based on previous performance. The authors explore the variation in abnormal returns of long-only and long-short momentum strategies using various style-based indexes such as Russell value/growth indexes, Fama-French value/growth indexes, and MSCI value/growth indexes.

The paper finds that the performance of style momentum varies across different index families. The long-only strategies create significant positive abnormal returns whereas the long-short strategies do not.

The paper also finds that abnormal returns are stronger and more significant when rotating within large cap value and growth indexes while abnormal returns are weaker and inconsistent when rotating within small cap value and growth indexes.

Abstract Of Paper

In this study, we investigate the return enhancement ability of style momentum strategy: a strategy that switches between value and growth styles based on previous performance. We explore the variation in abnormal returns of long-only and long-short momentum strategies using various style based indexes (Russell value/growth indexes, Fama-French value/growth indexes, and MSCI value/growth indexes) where value and growth stocks are classified using different criteria. Our results show that the performance of style momentum does vary across different index families. We first find that in general the long-only strategies create significant positive abnormal returns whereas the long-short strategies do not. Second, for a fixed formation period, abnormal returns of the strategies tend to decrease when the length of holding periods increase. Third, abnormal returns are stronger and more significant when rotating within large cap value and growth indexes while abnormal returns are weaker and inconsistent when rotating within small cap value and growth indexes. Fourth, strategies based on rotating across all market cap levels do not generate consistently significant positive abnormal returns for Russell indexes or Fama-French indexes but they do for MSCI indexes. Fifth, individual stock momentum only explains a very small portion of the returns of style moment strategies.

Original paper – Download PDF

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Author

Zugang Liu
Pennsylvania State University Hazleton – Department of Business and Economics

Jia Wang
Rowan University

Conclusion

The paper “Do Style Momentum Strategies Produce Abnormal Returns: Evidence from Index Investing” by Zugang Liu and Jia Wang concludes that the performance of style momentum varies across different index families.

The authors use various style-based indexes such as Russell value/growth indexes, Fama-French value/growth indexes, and MSCI value/growth indexes to explore the variation in abnormal returns of long-only and long-short momentum strategies.

The paper finds that in general, the long-only strategies create significant positive abnormal returns whereas the long-short strategies do not.

The paper also finds that abnormal returns are stronger and more significant when rotating within large cap value and growth indexes while abnormal returns are weaker and inconsistent when rotating within small cap value and growth indexes.

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FAQ

What is the main focus of the paper “Do Style Momentum Strategies Produce Abnormal Returns: Evidence from Index Investing”?

The paper investigates the return enhancement ability of a style momentum strategy, which involves switching between value and growth styles based on previous performance. The authors explore the variation in abnormal returns of both long-only and long-short momentum strategies using different style-based indexes.

What are the key findings regarding the performance of style momentum strategies?

The paper finds that, in general, long-only strategies based on style momentum create significant positive abnormal returns, while long-short strategies do not exhibit the same level of significance. The abnormal returns tend to decrease when the length of holding periods increases, and the strength of abnormal returns is influenced by the specific index family and market cap level.

How does the performance of style momentum vary across different index families?

The paper observes variation in the performance of style momentum across different index families, such as Russell value/growth indexes, Fama-French value/growth indexes, and MSCI value/growth indexes. The significance of abnormal returns differs depending on the specific criteria used to classify value and growth stocks.

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