A risk-return explanation of the momentum-reversal “anomaly”

Booth, G. Geoffrey; Fung, Hung-Gay; Leung, Wai Kin

Abstract

This study investigates the nature of the momentum-reversal phenomenon exhibited by U.S. stock returns from 1962 to 2013. We use cumulative future returns of long–short portfolios, which are formed using prior returns as benchmarks, after portfolio formation to analyze the well-documented momentum-reversal pattern. Contrary to many previous studies our results demonstrate that there is no momentum-reversal anomaly. We show that size (market capitalization), which is often considered a proxy for risk, eventually dominates momentum's initial effect, causing stock prices and, hence, returns to move in the opposite direction. We demonstrate that this latter price movement is likely to be related to institutional trading.

Citation

Booth, G. G., Fung, H.-G., & Leung, W. K. (2016). A risk-return explanation of the momentum-reversal “anomaly”. Journal of Empirical Finance, 35, https://doi.org/10.1016/j.jempfin.2015.10.007

• Journal Article Type: Article
• Acceptance Date: Oct 6, 2015
• Online Publication Date: Oct 23, 2015
• Publication Date: Jan 2, 2016
• Deposit Date: Nov 3, 2017
• Journal: Journal of Empirical Finance
• Print ISSN: 0927-5398
• Electronic ISSN: 1879-1727
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 35
• DOI: https://doi.org/10.1016/j.jempfin.2015.10.007
• Keywords: Asset pricing; Stock returns; Momentum; Market capitalization
• Public URL: https://nottingham-repository.worktribe.com/output/773943
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S092753981500105X?via%3Dihub
• Contract Date: Oct 31, 2017