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Feasible momentum strategies: Evidence from the Swiss stock market

Rey, David ; Schmid, Markus

In: Financial Markets and Portfolio Management, 2007, vol. 21, no. 3, p. 325-352

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    Title
    • Feasible momentum strategies: Evidence from the Swiss stock market
    Author
    • Rey, David. Department of Finance, University of Basel, Holbeinstrasse 12, 4051, Basel, Switzerland
    • Schmid, Markus. Swiss Institute of Banking and Finance, University of St. Gallen, 9000, St. Gallen, Switzerland
    Document Type
    • Postprint
    Language
    • English
    Published in
    • Financial Markets and Portfolio Management, 2007, vol. 21, no. 3, p. 325-352. Springer US; http://www.springer-ny.com
    Other Version
    OAI-PMH Identifier
    • oai:doc.rero.ch:317303
    Summary
    While there is little controversy on the profitability of momentum strategies, their implementation is afflicted with many difficulties. Most important, chasing momentum can generate high turnover. Though there are already several attempts to make momentum strategies less expensive with respect to transaction costs, we go a step further in the simplification of momentum strategies. By restricting our sample to Switzerland's largest blue-chip stocks and choosing only one winner and one loser stock, we find average returns to our momentum arbitrage portfolios of up to 44%p.a. depending on the formation and holding periods. While unconditional risk models are at odds with momentum profits, stock market predictability and time-varying expected returns explain a large part of the momentum payoffs, including the post-holding period behavior of the winner and loser stocks (overreaction and subsequent price correction)