Profitability Of Momentum Strategies
NBER WORKING PAPER SERIES
PROFITABILITY OF MOMENTUM
STRATEGIES: AN EVALUATION
OF ALTERNATIVE EXPLANATIONS
Narasimhan Jegadeesh
Sheridan Titman
Working Paper 7159 http://www.nber.org/papers/w7 159
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
June 1999
This paper has benefited from the excellent research assistance of Fei Zou and helpful comments from the participants of finance workshops at Indiana University and the University of Texas. All opinions expressed are those of the authors and not those of the National Bureau of Economic Research.
© 1999 by Narasimhan Jegadeesh and Sheridan Titman. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
Profitability of Momentum Strategies:
An Evaluation of Alternative Explanations
Narasimhan Jegadeesh and Sheridan Titman
NBER Working Paper No. 7159
June 1999
JELNo. G12
ABSTRACT
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990 's suggesting that the original results were not a product of data snooping bias.
The paper also examines the predictions of recent behavioral models that propose that momentum
profits are due to delayed overreactions which are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. Although we find no evidence of significant return reversals in the 2 to 3 years following the following formation date, there are significant return reversals 4 to 5 years after the formation date. Our analysis of posthiding period returns sharply rejects a claim in the literature that the observed momentum profits can
be explained completely by the cross-sectional dispersion in expected returns.
Narasimhan Jegadeesh
PROFITABILITY OF MOMENTUM
STRATEGIES: AN EVALUATION
OF ALTERNATIVE EXPLANATIONS
Narasimhan Jegadeesh
Sheridan Titman
Working Paper 7159 http://www.nber.org/papers/w7 159
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
June 1999
This paper has benefited from the excellent research assistance of Fei Zou and helpful comments from the participants of finance workshops at Indiana University and the University of Texas. All opinions expressed are those of the authors and not those of the National Bureau of Economic Research.
© 1999 by Narasimhan Jegadeesh and Sheridan Titman. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
Profitability of Momentum Strategies:
An Evaluation of Alternative Explanations
Narasimhan Jegadeesh and Sheridan Titman
NBER Working Paper No. 7159
June 1999
JELNo. G12
ABSTRACT
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990 's suggesting that the original results were not a product of data snooping bias.
The paper also examines the predictions of recent behavioral models that propose that momentum
profits are due to delayed overreactions which are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. Although we find no evidence of significant return reversals in the 2 to 3 years following the following formation date, there are significant return reversals 4 to 5 years after the formation date. Our analysis of posthiding period returns sharply rejects a claim in the literature that the observed momentum profits can
be explained completely by the cross-sectional dispersion in expected returns.
Narasimhan Jegadeesh
References: Banz, R., 1981, "The relation between return and market value of common stocks," Journal of Financial Economics 9, 3-18. Barbens, N., A. Shleifer, and R. Vishny, 1998, "A model of investor sentiment," Journal of Financial Economics 49(3), 307-343. Chan, L.K., N. Jegadeesh and J. Lakonishok, 1996, "Momentum Strategies," Journal of Finance 51, 1681-1713. Conrad, J., and G. Kaul, 1993, "Long-term overreaction or biases in computed returns?" Journal of Finance 48, 39-63. Conrad, J., and G. Kaul, 1998, "An anatomy of trading strategies," Review of Financial Studies 11,489-519. Daniel, K., D. Hirshleifer, and A. Subrahmanyam, 1998, "Investor Psychology and security market under-and overreactions," Journal of Finance 53, 1839-1886. Daniel, K. D. and S. Titman, 1997, "Evidence on the characteristics of cross-sectional variation in stock returns," Journal of Finance 52, 1-33. DeBondt, W.F.M and R. H. Thaler, 1985, "Does the stock market overreact?" Journal of Finance 40, 793-805. DeLong, J.B., A. Shleifer, L.H. Summers, Waldmann, R.J., 1990, "Positive feedback investment strategies and destabilizing rational speculation, Journal of Finance 45, 379-395. Edwards, W., 1962, "Conservatism in human information processing," In: Kleimutz, B. (ed.), Representation of Human Judgement, John Wiley and Sons, New York, 17-52 Fama, E., and K. French, 1993, "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics 33, 3-56. Fama, E., and K. French, 1996, "Multifactor explanations of asset pricing anomalies," Journal of Financial Economics 51, 5 5-84. Grinblatt, M. and T. Moskowitz, 1999, "Does industry explain momentum," Journal of Finance (forthcoming). Grundy, B. D. and S. J. Martin, 1998, "Understanding the nature of risks and the sources of rewards to momentum investing," working paper, Wharton School, U Haugen, R. A., 1999, The New Finance, Prentice Hall, Upper Saddle River, NJ. Keim, D. B., 1983, "Size-related anomalies and stock return seasonality: Further empirical evidence," Journal of Financial Economics 12, 13-32. Jegadeesh, N., and S. Titman, 1993, "Returns to buying winners and selling losers: Implications for stock market efficiency," Journal of Finance 48, 65-9 1. Lakonishok, J., A. Shleifer, and R. W. Vishny, 1994, Contrarian investment, extrapolation and risk, Journal of Finance 49, 154 1-78. Lo, A., and A. C. MacKinlay, 1990, "When are contrarian profits due to stock marketoverreaction?," Review of Financial Studies 3, 175-208. Loughran, T., and J. R. Ritter, 1995, The new issues puzzle, Journal of Finance Merton, R. C., 1980, "On estimating the expected return on the market: An exploratory investigation," Journal of Financial and Quantitative Analysis 7, 323-361. Tversky, A. and D. Kahneman, 1974, "Judgement under uncertainty: Heuristics and Biases," Science 185, 1124-1131. Rowenhorst, K.G., 1998, "International momentum strategies," Journal of Spiess, D. Katherine, and John Affleck-Graves, 1995, Underperformance in long-run stock returns following seasoned equity offerings, Journal of Financial Economics 38, 243-267.