Momentum Strategies (Part 2)

An academic paper read by Sawyer Investment Management Company regarding the effects of price momentum and earnings momentum on stock returns (Part 2)

Abstract:
We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.

Citation:
Chan, L. K. C., Jegadeesh, N., & Lakonishok, J. (1996). Momentum Strategies. Journal of Finance, 51(5), 1681–1713.

Link to Paper:
https://kantakji.com/media/174618/file1391.pdf

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

Momentum Strategies

An academic paper read by Sawyer Investment Management Company regarding the effects of price momentum and earnings momentum on stock returns.  (Part 1)

 Abstract:
We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.

Citation:
Chan, L. K. C., Jegadeesh, N., & Lakonishok, J. (1996). Momentum Strategies. Journal of Finance, 51(5), 1681–1713.

Link to Paper:
https://kantakji.com/media/174618/file1391.pdf

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

Profitability of Momentum Strategies: An Evaluation of Alternative Explanations (Part 2)

An academic paper read by Sawyer Investment Management Company regarding the source of momentum returns. (Part 2)

Abstract:
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990s, suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions that are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution.

Citation:
Jegadeesh, N., & Titman, S. (2001). Profitability of Momentum Strategies: An Evaluation of Alternative Explanations. Journal of Finance, 56(2), 699–720.

Link to Paper:
http://www.trendrating.com/wp-content/uploads/white-papers/profitability_of_momentum_strategies.pdf

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

Profitability of Momentum Strategies: An Evaluation of Alternative Explanations

An academic paper read by Sawyer Investment Management Company regarding the source of momentum returns.

Abstract:
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990s, suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions that are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution.

Citation:
Jegadeesh, N., & Titman, S. (2001). Profitability of Momentum Strategies: An Evaluation of Alternative Explanations. Journal of Finance, 56(2), 699–720.

Link to Paper: http://www.trendrating.com/wp-content...

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant. SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com 
https://www.facebook.com/Sawyer-Inves...
https://twitter.com/SawyerInvest

Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency (Part 2)

An academic paper summarized by Sawyer Investment Management Company regarding the abnormal returns attributable to owning momentum stocks.

Abstract: This paper documents that strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over 3- to 12-month holding periods. We find that the profitability of these strategies are not due to their systematic risk or to delayed stock price reactions to common factors. However, part of the abnormal returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented.

Citation: Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. Journal of Finance, 48(1), 65–91.

Link to Paper: http://www.business.unr.edu/faculty/liuc/files/BADM742/Jegadeesh_Titman_1993.pdf

About Sawyer Investment Management Company: SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestement.com 
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency (Part 1)

Buying past winners and selling past losers tends to earn abnormal profits over holding periods less than a year.

 

Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. Journal of Finance, 48(1), 65–91.

Cross-sectional and Time-series Determinants of Momentum Returns

Previous studies have found that previous winners over a 3-12 month period will show 1%/month profits over the next 12 months.  This has been empirically confirmed across several markets and time periods, even back to the 1920s.

Several reasons for this phenomenon to occur have been proposed: under-reaction to information; delayed over-reaction to information; or an undetected risk.  In particular Conrad and Karl in a previous study find it to be due to cross-sectional dispersion in unconditional expected returns.

The authors find Conrad and Karl's study to be flawed due to a small sample bias, and they prove that their conclusion explains very little, if any, of the momentum profits.  In fact, they say "virtually none of the momentum profits can be attributed to compensation for risk."

Jegadeesh, N., & Titman, S. (2002). Cross-Sectional and Time-Series Determinants of Momentum Returns. Review of Financial Studies, 15(1), 143–157.

The Profitability of Momentum Strategies

The authors study the effects of price and earnings momentum over the period 1973-1993 in the United States equity market.  They find that winners over the past 6 months significantly outperform losers over the next 6-12 months.

Drilling in, they find that price momentum produces better returns for longer holding periods than earnings momentum.  They contribute this to the theory that earnings is more of a short-term measure; whereas price changes could be due to very long-term changes.  They even found these things to be true for large-cap stocks, which would be expected to not exhibit as much momentum capture due to their better and more public information than that of small-caps.

They contribute this effect to several possibilities: the market does not fully respond to new information, due to investors' conservatism bias (where they are reluctant to change prior opinions); or maybe by analysts being slow to revise estimates.  They note that the momentum effect is not caused by the trades of trend chasers, because there is no subsequent reversal to bring the stock back to equilibrium (even out to the 3rd year).

Chan, L. K. C., Jegadeesh, N., & Lakonishok, J. (1999). The Profitability of Momentum Strategies. Financial Analysts Journal, 55(6), 80.