Understanding the Nature of the Risks and the Source of the Rewards to Momentum Investing

Posted: 25 Oct 2000

See all articles by Bruce D. Grundy

Bruce D. Grundy

RSFAS Australian National University

J. Spencer Martin

University of Melbourne - Faculty of Business and Economics; Financial Research Network (FIRN)

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Abstract

Buying recent winners and shorting recent losers guarantees time varying factor exposures in accordance with the performance of common risk factors during the ranking period. Adjusted for this dynamic risk exposure, momentum profits are remarkably stable across subperiods of the entire post 1926 era. Factor models can explain ninety-five percent of winner or loser return variability, but cannot explain their mean returns. Momentum strategies which base winner or loser status on stock-specific return components are more profitable than those based on total returns. Neither industry effects nor cross-sectional differences in expected returns are the primary cause of the momentum phenomenon.

Keywords: Factor loadings, hedging, momentum

JEL Classification: G11, G12

Suggested Citation

Grundy, Bruce D. and Martin, J. Spencer, Understanding the Nature of the Risks and the Source of the Rewards to Momentum Investing. Available at SSRN: https://ssrn.com/abstract=240560

Bruce D. Grundy

RSFAS Australian National University ( email )

Kingsley Street
Acton ACT
Australia
0431247108 (Phone)

J. Spencer Martin (Contact Author)

University of Melbourne - Faculty of Business and Economics ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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