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Are momentum profits driven by the cross-sectional dispersion in expected stock returns?

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  • Bhootra, Ajay

Abstract

Consistent with the hypothesis that momentum profits are attributable to the cross-sectional dispersion in expected returns, Bulkley and Nawosah (2009) report that momentum is nonexistent in demeaned returns. Motivated by their work, I examine whether absence of momentum in demeaned returns is robust to methodological adjustments that mitigate microstructure biases. I find that with commonly employed techniques including skipping a month between the formation and holding periods and excluding firms priced less than $5 (penny stocks) from the sample, the mean monthly momentum profit in demeaned returns increases from -0.37% to 1.02% over the 1963 to 2006 sample period. The results highlight the critical importance of using microstructure screens in empirical momentum studies.

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  • Bhootra, Ajay, 2011. "Are momentum profits driven by the cross-sectional dispersion in expected stock returns?," Journal of Financial Markets, Elsevier, vol. 14(3), pages 494-513, August.
    • Handle: RePEc:eee:finmar:v:14:y:2011:i:3:p:494-513
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    3. Antonina Waszczuk, 2013. "Do local or global risk factors explain the size, value and momentum trading pay-offs on the Warsaw Stock Exchange?," Applied Financial Economics, Taylor & Francis Journals, vol. 23(19), pages 1497-1508, October.
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    9. Riza Demirer & Rangan Gupta & Zhihui Lv & Wing-Keung Wong, 2019. "Equity Return Dispersion and Stock Market Volatility: Evidence from Multivariate Linear and Nonlinear Causality Tests," Sustainability, MDPI, vol. 11(2), pages 1-15, January.
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    12. Calès, Ludovic & Chalkis, Apostolos & Emiris, Ioannis Z., 2019. "On the cross-sectional distribution of portfolio returns," Working Papers 2019-11, Joint Research Centre, European Commission.
    13. Ludovic Cal`es & Apostolos Chalkis & Ioannis Z. Emiris, 2021. "The cross-sectional distribution of portfolio returns and applications," Papers 2105.06573, arXiv.org.
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    18. Waszczuk, Antonina, 2013. "A risk-based explanation of return patterns—Evidence from the Polish stock market," Emerging Markets Review, Elsevier, vol. 15(C), pages 186-210.
    19. Eriksen, Jonas N., 2019. "Cross-sectional return dispersion and currency momentum," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 91-108.
    20. Bhootra, Ajay, 2018. "Another look at anchoring and stock return predictability," Finance Research Letters, Elsevier, vol. 25(C), pages 259-265.
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