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Momentum change, industry group rotation and portfolio returns

Author

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  • Muhammad M Islam

    (Concord University)

  • Lawrence Gomes

Abstract

Prior research on momentum investing shows that over the intermediate term (3–12 months) stocks that outperform (underperform) in a previous time period continue to do so in a subsequent time period. It has also been demonstrated that similar results apply to sectors or industries. Evidence suggests that industry momentum effect is distinct from stock momentum, especially for large capitalization stocks. Accordingly, exploiting industry momentum can be an expedient way of asset allocation among sectors or industries. In this article, we propose an adjustment of momentum investing. We explore momentum change as a basis of portfolio selection. Considering long positions only, we show that the strategy produces significantly higher absolute and risk-adjusted returns when applied to the Standard and Poor's industry indices (1971–1997) relative to the simple momentum strategy of buying winners. A dummy variable regression is used to validate the results.

Suggested Citation

  • Muhammad M Islam & Lawrence Gomes, 2011. "Momentum change, industry group rotation and portfolio returns," Journal of Asset Management, Palgrave Macmillan, vol. 12(6), pages 426-437, December.
    • Handle: RePEc:pal:assmgt:v:12:y:2011:i:6:d:10.1057_jam.2011.24
    DOI: 10.1057/jam.2011.24
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    References listed on IDEAS

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