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Size and Momentum Profitability in International Stock Markets

Last Updated on 10 February, 2024 by Rejaul Karim

In the research paper “Size and Momentum Profitability in International Stock Markets” by Peter Steffen Schmidt, Urs von Arx, Andreas Schrimpf, Alexander F. Wagner, and Andreas Ziegler, the authors explore the relationship between the profitability of momentum strategies and firm size using an extensive dataset encompassing 14 global stock markets.

The findings reveal that international momentum profitability is significantly higher in medium-sized companies compared to larger ones. Although momentum premia are notably reduced by trading costs, medium-sized stocks largely retain their economic and statistical significance within most international equity markets, even after accounting for these costs.

Conversely, exploiting the momentum exhibited by small stocks proves to be challenging due to trading costs.

This paper contributes valuable insights into the relationship between size, momentum, and trading costs in international equity markets, offering a deeper understanding of asset pricing anomalies.

Abstract Of Paper

We study the link between the profitability of momentum strategies and firm size, drawing on an extensive dataset covering 14 stock markets across the globe. International momentum profitability is markedly higher in medium-size than in big stocks. Momentum premia are considerably diminished by trading costs, when taking into account the actual portfolio turnover incurred when implementing this strategy. Thus, while small stocks exhibit momentum, exploiting this feature is hardly feasible. By contrast, momentum premia especially for medium-sized stocks still remain economically and statistically significant in most equity markets worldwide after adjusting for trading costs.

Original paper – Download PDF

Here you can download the PDF and original paper of Size and Momentum Profitability in International Stock Markets.

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Author

Peter Steffen Schmidt
University of Zurich – Department of Business Administration

Urs von Arx
ETH Zürich; University of Zurich – Center für Nachhaltigkeit und unternehmerische Verantwortung (CCRS)

Andreas Schrimpf
Bank for International Settlements (BIS) – Monetary and Economic Department; Centre for Economic Policy Research (CEPR); University of Tuebingen

Alexander F. Wagner
University of Zurich – Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute

Andreas Ziegler
University of Kassel

Conclusion

In conclusion, the research paper “Size and Momentum Profitability in International Stock Markets” by Peter Steffen Schmidt, Urs von Arx, Andreas Schrimpf, Alexander F. Wagner, and Andreas Ziegler sheds light on the relationship between momentum strategies’ profitability and firm size in 14 worldwide stock markets.

The findings highlight that medium-sized stocks exhibit significantly higher international momentum profitability compared to larger stocks. Additionally, it is worth noting that trading costs can substantially reduce momentum premia when considering the actual portfolio turnover involved in implementing the strategy.

This results in exploiting momentum in small stocks being infeasible, while momentum premia for medium-sized stocks continue to demonstrate economic and statistical significance across global equity markets after adjusting for trading costs.

The study offers valuable insights into size, momentum, and trading costs interactions, contributing to a broader understanding of international equity markets and asset pricing anomalies.

Related Reading:

Cross-Country Composite Momentum

Unraveling Momentum’s Moments

FAQ

Q1: What is the main finding regarding the relationship between firm size and momentum profitability in international stock markets?

The main finding is that international momentum profitability is significantly higher in medium-sized companies compared to larger ones. Medium-sized stocks demonstrate more substantial momentum premia across 14 global stock markets, indicating a size-dependent relationship with momentum profitability.

Q2: How do trading costs impact momentum premia, and what is the feasibility of exploiting momentum in small stocks?

Trading costs considerably diminish momentum premia when considering the actual portfolio turnover in implementing the strategy. Exploiting momentum in small stocks is found to be challenging due to these trading costs. However, medium-sized stocks retain economic and statistical significance in terms of momentum premia across global equity markets after adjusting for trading costs.

Q3: What is the significance of this research for understanding asset pricing anomalies in international equity markets?

The research contributes valuable insights into the dynamics of size and momentum profitability in international stock markets. It enhances our understanding of how firm size influences momentum premia and how trading costs impact the feasibility of exploiting momentum strategies. These findings provide a nuanced perspective on asset pricing anomalies, particularly in the context of different-sized stocks in global equity markets.

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