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!

Trading Strategies Based on Past Returns – Evidence from Germany

Last Updated on 10 February, 2024 by Rejaul Karim

Trading Strategies Based on Past Returns – Evidence from Germany” by Martin H. Schmidt is a comprehensive study that examines the efficacy of various trading strategies in the context of the German market from 1965 to 2014.

The research particularly highlights the persistent non-zero returns earned through momentum investing, with an emphasis on the performance of the classical momentum strategy over the previous two to twelve months. Interestingly, recent years have shown even larger returns than in the US market.

However, the net profitability of this strategy may be hindered by high transaction costs associated with trading disproportionately small stocks, particularly those in the loser portfolio. By shifting focus to the winner portfolio and avoiding issues related to costly loser portfolios, the study indicates the potential for consistently strong and abnormal profits even after accounting for transaction costs.

This research offers valuable insights into the performance and profitability of momentum and contrarian trading strategies within the German market.

Abstract Of Paper

Among the various strategies studied in this paper, only momentum investing appears to earn persistently non-zero returns: from 1965 to 2014, the classical momentum strategy based on performance over the previous two to twelve months earned an average return of 1.57% per month (excluding microcap stocks and value-weighted returns). In the most recent ten-year time period, this return has been even larger – 2.27% – which is much larger than in the U.S. However, the profitability net of transaction costs appears weak because the strategy involves trading in disproportionately small stocks with high transaction costs; this has been observed for the loser portfolio in particular. A strategy that concentrates only on the winner portfolio and, thus, avoids potential problems associated with (short) selling the costly loser portfolio appears to earn strong and persistently abnormal profits, even after transaction costs.

Original paper – Download PDF

Here you can download the PDF and original paper of Trading Strategies Based on Past Returns – Evidence from Germany.

(An option to download will come shortly)

Author

Martin H. Schmidt
Humboldt University of Berlin – School of Business and Economics

Conclusion

In conclusion, “Trading Strategies Based on Past Returns – Evidence from Germany” by Martin H. Schmidt presents a thorough analysis of various trading strategies, ultimately demonstrating the persistent non-zero returns of momentum investing in the German market from 1965 to 2014.

The research showcases the advantages of the classical momentum strategy, particularly its increased returns compared to the US market in recent years. However, profitability may suffer due to high transaction costs tied to trading in small stocks within the loser portfolio.

By focusing on the winner portfolio and avoiding problems related to costly loser portfolios, the study uncovers the potential for obtaining consistently robust and abnormal profits even after accounting for transaction costs.

This in-depth research sheds light on the nuances of momentum, stock reversal, contrarian strategies, and their predictability, providing valuable insights and contributions to the financial literature.

Related Reading:

Do the Size, Value, and Momentum Factors Drive Stock Returns in Emerging Markets?

Has Momentum Lost Its Momentum?

FAQ

Q1: What is the primary focus of the research paper by Martin H. Schmidt?

The research paper by Martin H. Schmidt primarily focuses on examining the efficacy of various trading strategies in the German market from 1965 to 2014. The study particularly highlights the performance of the classical momentum strategy over different timeframes and assesses its profitability.

Q2: What is the key finding regarding momentum investing in the German market?

The research finds that, among various strategies studied, only momentum investing appears to earn persistently non-zero returns in the German market. The classical momentum strategy, based on performance over the previous two to twelve months, demonstrates an average return of 1.57% per month from 1965 to 2014, with even larger returns in recent years.

Q3: Why might the net profitability of the momentum strategy be weak, and how does the study address this issue?

The net profitability of the momentum strategy may be hindered by high transaction costs associated with trading disproportionately small stocks, particularly in the loser portfolio. The study addresses this by proposing a strategy that concentrates only on the winner portfolio, avoiding the problems related to costly loser portfolios. This approach indicates the potential for consistently strong and abnormal profits even after accounting for transaction costs.

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