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Momentum Factor Investing in 19th Century Imperial Russia

Posted April 26, 2019
Wesley Gray
Alpha Architect

Is momentum data-mined? Why does momentum exist?
Read this research paper review by Wesley Gray, PhD to learn more!

The post ‘Momentum Factor Investing in 19th Century Imperial Russia?’ first appeared on the Alpha Architect Blog 

Momentum Factor Investing in 19th Century Imperial Russia

  • William Goetzmann and Siman Huang
  • JFE, forthcoming.
  • A version of this paper can be found here.

What are the research questions?

Momentum is often considered the “premier anomaly” because of the large historical excess returns generated by the process.(1) For efficient market hypothesis proponents, momentum has a problem — deriving an exclusively risk-based foundation for momentum is difficult, if not impossible (discussion here). Without a purely risk-based hypothesis, one needs to rely on behavioral theories to understand why momentum returns exist in equilibrium. Of course, with additional theories comes additional problems. First, when one relies on multiple theories, the ability to fit a theory to data is much higher, and researchers often worry that the empirical results from momentum might just be an exceptional case of data-mining. Second, with more theories comes more predictions (often in conflict), which need to be assessed and tested using data.

The authors seeks to address the following questions:

  1. Is momentum data-mined? This paper addresses the data-mining issue by testing a truly unique out-of-sample test of the traditional cross-sectional momentum effect.
  2. Why does momentum exist? The paper addresses alternative theories for “why momentum exists” using a unique laboratory of the St. Petersburg Stock Exchange from January 1865 to July 1914.

What are the Academic Insights?

  1. Yes. Momentum effects are very strong in the author’s sample suggesting that prior results are unlikely to be attributable to “data-mining.”
  2. Overreaction.  There is little evidence that momentum effects are driven by the institutional theory (covered here), “crash risk”, or macro-economic sensitivity. The evidence from the paper supports the behavioral theory of overreaction and not underreaction to positive news.

Why does it matter?

Momentum is one of the more hotly debated factor anomalies. This paper allows the authors to test competing theories. Visit Alpha Architect to read more about the results.

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