On style momentum strategies. Aarts, F., & Lehnert, T. (2005)

The authors want to understand the momentum of various styles (e.g., the size or value factor) in securities' returns; for example, these styles have outperformed in some time periods and underperformed in other time periods; so is there a persistence in the returns to these styles over time, and would it be a good investment strategy to buy into the styles that have performed well in the recent past?

To do so, the authors split the stocks of the FTSE 350 into the 9 Morningstar style boxes (i.e., 3 size boxes times 3 value/growth boxes), then explore the returns to portfolios that go long the recent highest performing style and short the recent lowest performing style over various formation and holding periods.  In doing so, they find the only time periods where the strategy has statistically significant returns is for the 3/3 formation/holding period and the 6/9 formation/holding period, and the excess returns were in the 0.58% to 0.78% range.

Next, the authors formed price momentum portfolios by going long the recent highest performing decile of stocks and going short the recent lowest performing decile of stocks.  They find that the only formation/holding periods with statistically significant excess returns are the 3/9 and 6/9 formation/holding periods, and the excess returns were in the 0.67% to 1.60% range.

 

Aarts, F., & Lehnert, T. (2005). On style momentum strategies. Applied Economics Letters, 12(13), 795–799.

https://doi.org/10.1080/13504850500373602

Barberis and Shleifer (2003) suggest that US investors classify assets into different styles based on, for example, market capitalization or B/M ratios. They find that prices can deviate substantially from fundamental values as a style's popularity changes over time. In this paper, we discuss implications of this prediction and empirically investigate the profitability of style momentum strategies for the UK stock market. Results suggest that a simple trading rule can generate significant positive returns, but for our sample of FTSE 350 stocks those strategies are less profitable and more risky compared to regular momentum strategies.