Screening for stock-characteristics and continuation of the dual momentum approach.

摘要

The momentum strategy suggests buying stocks that have appreciated the most and selling those that have depreciated the most. The strategy is well documented and has shown persistence over the years. A problem most trading strategies face is that profits attenuate, or even vanish, as they become more widely known. The profits from the momentum strategy have clearly attenuated since Carhart presented his paper in 1997, where he showed that momentum had significant explanatory power of future returns. Attenuation requires finding ways to modify the momentum strategy in order to elevate the profits. This paper looks into two potential techniques. One focuses on identifying stock characteristics associated with high momentum returns. Elevation would then be achievable by screening the universe of stocks for these characteristics before applying the momentum strategy. Another technique, dual momentum, only allows a stock to enter the portfolio if it both exhibits relatively high momentum and has momentum higher than that of a certain benchmark. Of the characteristics considered only gross profitability exhibited consistent higher marginal momentum returns but following a strategy that screens for this characteristic does not improve the performance. Recent research has documented idiosyncratic risk as a common explanatory variable of high and significant momentum returns. Consistent higher marginal returns could not be shown for this characteristic. The dual momentum approach did not improve the performance. The conclusion is that momentum may be explained by a herding behavior that results in investors ignoring fundamentals.