Profitability of Momentum Strategies: An Evaluation of Alternative Explanations
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What they found
The authors returned to their momentum result with an extra decade of data (1990 to 1998) to check whether the original finding was a fluke of data mining. Momentum profits continued at similar magnitude in the new period. They also examined what happens after the holding period and found returns in years two through five after portfolio formation were negative, which supports behavioral explanations (delayed overreaction) over pure risk explanations.
What you can use
- Momentum passed a true out-of-sample test, which most anomalies fail.
- The long-run reversal after the momentum window suggests trends end in overshoot, so exits matter as much as entries.
- Momentum's persistence after publication is evidence it is not simply an artifact of one dataset.
Caveats
Still U.S. equities only. Post-2001 experience includes the 2009 momentum crash, which this sample does not contain.
Tags: momentum, equities, out-of-sample, replication
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.