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Persistency of the Momentum Effect

Last Updated on 10 February, 2024 by Rejaul Karim

Persistency of the Momentum Effect” is a research paper by Hong-Yi Chen, Pin-Huang Chou, and Chia-Hsun Hsieh that investigates the robustness of momentum profits, generated from buying winners and selling losers, in global stock markets.

The researchers identify that more than 40% of winners and losers fall out of their respective groups in the month following their formation, indicating that intermediate-term momentum persistency is not universal among all stocks with extreme past performance.

This leads to a monthly loss of over 17% for a momentum strategy based on nonpersistent winners and losers, while persistent ones exhibit stronger performance.

Further analysis reveals that persistency is more prominent for stocks with greater information asymmetry and higher levels of heterogeneous investor beliefs, aligning with the underreaction hypothesis for price momentum.

Abstract Of Paper

Momentum profits, resulting from buying winners and selling losers, are robust in the stock market worldwide. However, more than 40% of winners and losers immediately fall out of their respective groups in the month following formation, suggesting that intermediate-term momentum persistency is not universal among all stocks with extreme past performance. The return reversals that these nonpersistent winners and losers exhibit in the month following formation are strong, resulting in a monthly loss of more than 17% for a momentum strategy constructed on such stocks. By contrast, persistent winners and losers, defined as those staying in their groups for at least one more month, exhibit much stronger performance persistency. Further analysis indicates that the persistency is stronger for stocks with greater information asymmetry and more extensively heterogeneous investor beliefs, consistent with the underreaction hypothesis for price momentum.

Original paper – Download PDF

Here you can download the PDF and original paper of Persistency of the Momentum Effect.

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Author

Hong-Yi Chen
National Chengchi University – Department of Finance

Pin-Huang Chou
National Central University

Chia-Hsun Hsieh
National Central University

Conclusion

In conclusion, the research paper “Persistency of the Momentum Effect” by Hong-Yi Chen, Pin-Huang Chou, and Chia-Hsun Hsieh highlights that while momentum profits may be robust globally, intermediate-term momentum persistency is not universal among all stocks.

The study reveals that nonpersistent winners and losers can lead to significant monthly losses for a momentum strategy, whereas persistent winners and losers demonstrate stronger performance persistency.

The findings also show that the persistency of momentum is more apparent in stocks with higher levels of information asymmetry and extensively heterogeneous investor beliefs, supporting the underreaction hypothesis for price momentum.

This crucial insight into the momentum effect in the stock market can help investors make more informed decisions, adjusting their strategies based on the factors contributing to momentum persistency.

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A Critique of Momentum Anomalies

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