The strategy of momentum investing says simply to buy stocks that are rising in value and sell those that are falling. Abnormal returns should be crowded-out, but have somehow remained remarkably persistent. This column explains the role of periodic crashes – when momentum investing fails – using historical data from Victorian London and the CSRP-era US. Crashes happen just when momentum investing has been most successful, and fund managers are able to attract the most capital.
Benjamin Chabot, Eric Ghysels, Ravi Jagannathan, 30 January 2015
Lukas Menkhoff, Lucio Sarno, Maik Schmeling, Andreas Schrimpf, 31 March 2012
Momentum trading – buying past winners and selling past losers – is a popular trading strategy in many assets. In foreign exchange high returns to momentum trading have fuelled concerns that it is little more than destabilising speculation. This column argues that, for better or worse, such strategies are likely to continue.
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