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Evolution of Historical Prices in Momentum Investing Analysis

Last Updated on 10 February, 2024 by Rejaul Karim

Evolution of Historical Prices in Momentum Investing” is a research paper by Li-Wen Chen, Hsin-Yi Yu, and Wen-Kai Wang that delves into the acceleration and deceleration patterns of historical prices and their predictive value for future expected returns in the context of momentum investing.

Analyzing the U.S. equity market between 1962 and 2014, the researchers establish a link between accelerated historical price increases in winners leading to higher future expected returns and accelerated historical price decreases in losers resulting in poorer future performance.

Furthermore, the study reveals that profits generated from buying past accelerated winners and shorting past accelerated losers significantly surpass traditional momentum profits by 51.47%.

These results persist even when accounting for characteristics typically associated with momentum explanations. The findings suggest possible underlying factors such as extrapolative bias and overreaction driving this accelerated profit phenomenon.

Abstract Of Paper

We find that the acceleration and deceleration patterns of historical prices are predictive of future expected returns in momentum investing in the U.S. equity market from 1962 to 2014. Winners with accelerated historical price increases deliver higher future expected returns and losers with accelerated historical price decreases perform more poorly in the future. Hence, the profit from buying past accelerated winners and shorting past accelerated losers is significantly higher than the momentum profit by 51.47%. Such profit cannot be subsumed by certain characteristics that have been considered to explain momentum. Possible explanations for our results include extrapolative bias and overreaction.

Original paper – Download PDF

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Author

Li-Wen Chen
National Chung Cheng University

Hsin-Yi Yu
National University of Kaohsiung

Wen-Kai Wang
National University of Kaohsiung – Department of Finance

Conclusion

In conclusion, “Evolution of Historical Prices in Momentum Investing” by Li-Wen Chen, Hsin-Yi Yu, and Wen-Kai Wang unveils the predictive powers of historical price acceleration and deceleration patterns in determining future expected returns in momentum investing.

The research, which encompasses the U.S. equity market from 1962 to 2014, showcases that winners exhibiting accelerated price increases deliver higher future returns, while losers with accelerated price decreases perform worse in the long run. Profits generated from buying past accelerated winners and shorting past accelerated losers outperform traditional momentum profits by a remarkable 51.47%.

Furthermore, these returns remain unexplained by previously documented momentum characteristics. This cutting-edge study provides fresh insights into momentum investing and offers plausible explanations for the observed results, such as extrapolative bias and overreaction, enriching our understanding of the dynamics that dictate investment outcomes.

Related Reading:

Investor Attention, Visual Price Pattern, and Momentum Investing

Persistency of the Momentum Effect

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