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Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics

Author

Listed:
  • Pavel Bandarchuk

    (State Street Global Advisors)

  • Jens Hilscher

    (International Business School, Brandeis University)

Abstract

Several recent studies document that sorting stocks first on certain stock-level characteristics and then on past returns results in elevated momentum profits. We show that such strategies enhance momentum profits simply by trading in stocks with more extreme past returns. Adjusted for this effect, elevated momentum profits resulting from characteristics (size, R², turnover, age, analyst coverage, analyst forecast dispersion, market-to-book, price, illiquidity, credit rating) disappear almost entirely. Interaction patterns have been used to support behavioral and limits-to-arbitrage explanations of momentum; our findings imply that explanations of momentum should instead focus on the link between momentum profits and extreme past returns.

Suggested Citation

  • Pavel Bandarchuk & Jens Hilscher, 2011. "Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics," Working Papers 38, Brandeis University, Department of Economics and International Business School.
  • Handle: RePEc:brd:wpaper:38
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    References listed on IDEAS

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    More about this item

    Keywords

    Momentum; Past Returns; Volatility; Stock-level Characteristics; Double Sorts;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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