Swing Trading Signals


Since 2013

  • 100% Quantified, data-driven and Backtested
  • We always show our results!
  • Signals every day via our site or email
  • Cancel at any time!

The Formation Process of Winners and Losers in Momentum Investing

Last Updated on 10 February, 2024 by Rejaul Karim

In the research paper “The Formation Process of Winners and Losers in Momentum Investing” by Li-Wen Chen, Wen-Kai Wang, and Hsin-Yi Yu, the authors delve into the intricacies of momentum investing by examining the formation process of past returns.

While previous studies have primarily focused on identifying winner and loser stocks, less attention has been paid to the development of past returns that lead to these classifications.

The paper introduces a model that demonstrates the joint effect of past returns and their formation process on future expected returns, shedding light on the underlying factors that contribute to a stock’s performance.

Empirical evidence reveals that incorporating specific historical price patterns into a zero-investment portfolio can enhance monthly momentum profit by 59%. Ultimately, understanding the process by which a stock becomes a winner or loser provides valuable insights for distinguishing the best and worst stocks within their respective categories.

Abstract Of Paper

Previous studies have focused on which stocks are winners or losers but have paid little attention to the formation process of past returns. This paper develops a model showing that past returns and the formation process of past returns have a joint effect on future expected returns. The empirical evidence shows that the zero-investment portfolio, including stocks with specific patterns of historical prices, improves monthly momentum profit by 59%. Overall, the process of how one stock becomes a winner or loser can further distinguish the best and worst stocks in a group of winners or losers.

Original paper – Download PDF

Here you can download the PDF and original paper of The Formation Process of Winners and Losers in Momentum Investing.

(An option to download will come shortly)

Author

Li-Wen Chen
National Chung Cheng University

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

Hsin-Yi Yu
National University of Kaohsiung

Conclusion

In conclusion, the research paper “The Formation Process of Winners and Losers in Momentum Investing” by Li-Wen Chen, Wen-Kai Wang, and Hsin-Yi Yu fills a gap in the existing literature by examining the formation process of past returns in momentum investing.

The authors developed a model illustrating the combined influence of past returns and their formation process on future expected returns. Empirical evidence validates that incorporating specific historical price patterns into a zero-investment portfolio significantly enhances monthly momentum profit, boosting it by 59%.

This study underscores the importance of understanding the process by which a stock becomes a winner or loser, as it helps further differentiate the best and worst stocks within their respective groups.

Chen, Wang, and Yu’s work contributes to a more comprehensive understanding of the dynamics of momentum investing, revealing the crucial role played by past returns formation in shaping future investment outcomes.

Related Reading:

The Acceleration Effect and Gamma Factor in Asset Pricing

Evolution of Historical Prices in Momentum Investing

FAQ

How does the research contribute to our understanding of momentum investing, and what empirical evidence supports the findings?

The study contributes to the understanding of momentum investing by highlighting the importance of the formation process of past returns. The authors show that incorporating specific historical price patterns into a zero-investment portfolio enhances monthly momentum profit by 59%. The empirical evidence validates the model’s effectiveness, providing insights into how the process by which a stock becomes a winner or loser can influence future expected returns.

What is the significance of the model developed by the authors, and how does it shed light on the factors influencing a stock’s performance?

The model developed by the authors illustrates the joint influence of past returns and their formation process on future expected returns. This sheds light on the factors influencing a stock’s performance within the context of momentum investing. Understanding how specific historical price patterns contribute to the formation of past returns provides valuable insights for distinguishing the best and worst stocks within their respective categories.

How does the research paper contribute to the existing literature on momentum investing, and what key takeaway does it provide for investors?

The research paper fills a gap in existing literature by emphasizing the formation process of past returns in momentum investing. The findings highlight the importance of considering historical price patterns when evaluating momentum strategies. The significant improvement in monthly momentum profit through the incorporation of these patterns into a zero-investment portfolio suggests a practical takeaway for investors looking to enhance their understanding and implementation of momentum investing strategies.

Find A Comprehensive Database of Research Papers On Trading Strategies here

Leave a Reply

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Monthly Trading Strategy Club

$42 Per Strategy

>

Login to Your Account



Signup Here
Lost Password