Profitable momentum trading strategies for individual investors. Market states and international momentum strategies. Using the url or doi link below will ensure access to this page indefinitely. This paper examines the profitability of momentum strategies implemented on international stock market indices. Many papers have documented that average stock returns are related to past performance. The individual investors comprehensive guide to momentum investing. Antonacci reveals how momentum investors could have achieved longrun returns nearly twice as high as the stock market over the. Turnover tend to be high for momentum strategies, which could reduce the net returns of a momentum strategy. Timeseries momentum strategies have received increased attention after they provided again, as in previous business cycle downturns, impressive diversi. This article explores an alternative definition of momentum that is calculated using the idiosyncratic returns from market regressions. A portfolio perspective we provide practical perspectives on momentum investing in stocks internationally.
Big risk, rare reward on the surface, investing strategies based on momentum are quite appealing. As a growing number of international equity funds gain access to foreign equity markets. This paper applies recent econometric tests of stochastic dominance hadar and russell, 1969. This strategy produces profits in 18 of the 20 markets studied, and the profits are significant in 10 markets. Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period while no consensus exists about the validity of this strategy, economists have trouble reconciling this phenomenon, using the efficientmarket hypothesis. International momentum strategies wiley online library. The international evidence is remarkably similar to findings for the u. The international momentum returns are correlated with those of the united states which suggests that exposure to a common factor may drive the profitability of momentum strategies. The remainder of the paper is organized as follows. Profitability of momentum stragegies in the international equity markets article pdf available in journal of financial and quantitative analysis 3502. The international momentum returns are correlated with those of the united states.
Section 3 and 4 discuss the data and the various implementations of the momentum trading strategies. Jan 26, 2017 momentum traders take advantage of shortterm price action in a stock. Global momentum strategies the journal of portfolio management. Not all stocks provide momentum trading set ups, and focusing on the wrong. Specifically, if the asset is classed as a momentum winner and the trend is positive, then long the position. Timeseries and crosssectional momentum strategies under. In our earnings momentum strategies, we use three different measures of earn ings news. The momentum profits arise mainly from timeseries predictability in stock market indicesvery little profit comes from predictability in the currency markets. Momentum strategies in the book often focus on selecting the top 50 or the top 300 momemtum stocks and rotating trades based off which show more momentum on a month by month basis.
We use stochastic dominance tests to distinguish between the hypothesis that there exists general asset pricing models that can explain momentum. Investment policy and portfolio management international momentum strategies k. First, we implement the momentum strategies based on individual stock market indices. Global momentum strategies the journal of portfolio. Citeseerx document details isaac councill, lee giles, pradeep teregowda. The momentum effect, first documented by jegadeesh and titman 1993 refers to the tendency for portfolios of stocks that performed well. If buys and sells are not timed correctly, they may result in significant losses. The sharpe ratios of the strategies based on intermediate horizon past performance are more than twice as large as the sharpe ratios of the strategies based on recent past performance. Based on the optimal implementation approach for each market, the overall performance of the two momentum strategies is eroded from 2. View the full article pdf abstract using data for 2,190 stocks from 12 european countries for the 197895 period, the author finds evidence that a diversified relative strength portfolio that invests in intermediate winners and sells prior intermediate losers earns roughly 1 percent each month. Dec 17, 2002 the international momentum returns are correlated with those of the united states which suggests that exposure to a common factor may drive the profitability of momentum strategies. Profitable momentum trading strategies for individual investors bryan foltice, thomas langer finance center munster, university of munster, 48143 munster, germany.
Because momentum strategies are relatively easy to implement, the results pose a challenge to our understanding of how information is incorporated into prices or, alternatively, how markets set expected returns. Managed futures strategies have been pursued by ctas since at least the 1970s, shortly after futures exchanges increased the number of. Our results indicate that the search for rational asset pricing explanations for the momentum effect may be a futile one. The 52week high momentum strategy in international stock. Whereas a swing trader may hold a stock for days or weeks, a momentum day trader will generally buy and sell a stock within the same day. Momentum strategies in commodity futures markets edhec risk. Profitability of momentum strategies in the international equity markets. Between 1980 and 1995 an internationally diversified portfolio of past shortterm winners. We study the 52week high momentum strategy in international stock markets proposed by george and hwang 2004. International momentum strategies rouwenhorst 1998. These results are robust to two subperiods with different risk and return characteristics and survive reasonable transaction costs for international index funds. Previous studies of international momentum strategies, e. Griffin is an associate professor of finance in the mccombs school ofbusinew at the university of texas at austin and the whircbox visiting fellow of behavioral finance at the yale school of m,iri,igenicni. Most momentum traders use stop loss or some other risk management technique to minimize losses in a losing trade.
To test the conflicting implications of these theories, we examine the re. There are now hundreds of factors in what john cochrane famously called the zoo of factors. Section i describes the sample and documents the profitability of mediumterm international momentum strategies. Momentum strategies to increase return and reduce risk. Unfortunately for individual investors, momentum investing, as originally outlined by jegadeesh and titman 1993, assumes a zerocost trading strategy, omits various which. Add trend following timeseries momentum in the next step, the paper explores adding a trendfollowing rule. Whitmore, 1970 to momentum strategies implemented on international stock market indices. The international momentum returns are correlated with the u. Pdf international momentum strategies semantic scholar. In his last book, quantitative value, author wes gray brought systematic value strategy from the hedge funds to the masses. Combination momentumcontrarian strategies, used to select from among 18 developed equity markets at a monthly frequency, outperform both pure momentum and pure contrarian strategies. Our results indicate statiscally significant evidence of momentum profits.
In previous and contemporary studies of momentum strategies, possible effects of. We nd a signi cant crosssectional spread in excess returns of up to 10% p. The focus is on intermediate momentum, meaning the last 12 months of prices. Momentum strategies in futures markets and trendfollowing funds. Buy stocks that have recently performed the best and avoid those that have. An assistant professor of finance in the zicklin school of business at baruch college of the city university of new york. To order reprints of this article, please contact dewey palmieri at dpalmieriat or 2122243675. Currency momentum strategies lukas menkho lucio sarnoz maik schmeling andreas schrimpfx abstract we provide a broad empirical investigation of momentum strategies in the foreign exchange market. In this regard, we dont want to predict when the momentum will happen, but we let the market tips his hands and then react. Trend following and momentum strategies for global reits. Momentum strategies that trade industries, investment styles, international equity indices, commodities, and currencies all exhibit the same phenomena. Momentum trading attempts to capitalize on market volatility.
The momentum profits arise mainly from timeseries predictability in stock market indices very little profit comes from predictability in the currency markets. The article looks at the performance of 56 momentum and contrarian strategies in commodity futures markets. For nearly three decades, scientific studies have explored omentum m investing strategies and observed stable excess returns in various financial markets. The paper, however, presents some evidence that the european and u.
The 52week high momentum strategy in international stock markets. Finding ideal trading candidates is of paramount importance. Geert, international momentum strategies february 1997. Our stochastic dominance approach yields consistent but more general results. Our first is the commonly used standardized unexpected earnings sue variable. Global momentum strategies a portfolio perspective. The best momentum trading strategy using the best forex momentum indicator our team at trading strategy guides believes that smart trading is the way to build the best momentum trading strategy. Momentum trading carries with it a higher degree of volatility than most other strategies.
In section 5, we analyse the results of both momentum strategies while section 6 provides us with the opportunity of to summarise our findings. However, there are only a small number that meet the requirements for investment that my coauthor, andrew berkin, and i establish in our book, your complete guide to factorbased investing. International momentum strategies rouwenhorst 1998 the. Managed futures strategies have been pursued by ctas since at least the 1970s, shortly after futures exchanges increased the number of traded contracts hurst, ooi and pedersen 2010. Momentum strategies, conditional value at risk, bootstrap. An associate professor of finance in the mccombs school of business at the university of texas at austin and the whitebox visiting fellow of behavioral finance at the yale school of management. A stochastic dominance approach article pdf available in journal of financial markets 81. Momentum strategies in commodity futures markets edhec. Profitability of momentum strategies 701 ners in the holding period represent their unconditional expected rates of return and thus predict that the returns of the momentum portfolio will be positive on average in any postranking period. Between 1980 and 1995 an internationally diversified portfolio of past. Moskowitz and grinblatt 1999 document momentum for industry portfolios, asness.
Return continuation is present in all twelve sample countries and lasts on average for about one year. International equity markets exhibit shortterm return continuation. If the momentum winner shows negative trend, then defer to treasury bills. Some even claim that transaction costs wipe out momentum profits. An internationally diversified portfolio of past winners outperformed a portfolio of past losers by about 1 percent per month. Jan 27, 2018 time series momentum motivates trend following. Basic theory of momentum strategies systemic risk and. Profitability of momentum strategies in the international. Therefore, the lagged return of the market is the type of conditioning information that can be relevant for predicting the profitability of momentum strategies. Peter james lingane, ea, cfp february 28, 2017 this is a working document. Such momentum and trend following combinations can deliver higher. Jul 26, 2019 the best momentum trading strategy using the best forex momentum indicator our team at trading strategy guides believes that smart trading is the way to build the best momentum trading strategy. The ranking variable used in our price momentum strategy is a stocks past compound return, extending back six months prior to portfolio formation. While contrarian strategies do not work, momentum strategies are found to be profitable in commodity futures markets over horizons that range from 1 to 12 months.
Investment policy and portfolio management international. Profitability of momentum stragegies in the international. We find that the profits of three types of momentum strategies all exist persistently during the period 1974 to 2007. Quantitative momentum brings momentum investing out of wall street and into the hands of individual investors. Trend following is a market directional strategy that promises convex beta and good diversification for outright long and carry portfolios as it normally performs well in protracted good and bad times alike. In this paper, we extend the analysis of momentum strategies to the global equity markets, and contribute to the literature as follows. View enhanced pdf access article on wiley online library html view.1563 157 1579 662 175 1196 1465 678 1479 900 475 985 453 900 1344 978 1149 615 780 1497 869 966 457 278 827 462 434 484 248 1422 67 1222 25