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:
- 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.
- 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?
- Yes. Momentum effects are very strong in the author’s sample suggesting that prior results are unlikely to be attributable to “data-mining.”
- 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.
Disclosure: Alpha Architect
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).
This site provides NO information on our value ETFs or our momentum ETFs. Please refer to this site.
Disclosure: Interactive Brokers
Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Alpha Architect and is being posted with its permission. The views expressed in this material are solely those of the author and/or Alpha Architect and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.