Momentum investing

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Momentum Investing

An investment philosophy in which the investor buys (or short sells) securities that had been performing well over the previous three to 12 months and sells those that have been performing poorly over the same period. This is a form of short-term investing based on the underlying belief that trends generally continue for a long period of time. This belief is at odds with efficient markets theory, because momentum investing assumes that even inefficiently priced securities tend to remain inefficiently priced. Economists therefore disagree on whether momentum investing is a sound investment strategy. See also: Market momentum.
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Momentum investing.

A momentum investor focuses on stocks that are rising in value on increasing daily volume, and avoids stocks that are falling in price or that are perceived to be undervalued.

The logic is that when a pattern of growth has been established, it will continue to gain momentum and the growth will continue. Momentum investing is essentially the opposite of contrarian investing.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
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Momentum strategies call for frequent trading and thus incur high transaction costs.
Tajaddini and Crack (2012), report profitability of long and short momentum strategies to be 1 and 3% after considering the real transaction cost; t hey also indicate the decrease in profit for the last 5 years in the sample period.
Industry momentum strategy has an annualized Sharpe ratio of 0.56, and ranks third after net issuance and individual stock momentum strategies.
This study examines several aspects of the momentum strategies, such as profitability, risk-based explanation, and decomposition of the momentum profits.
They looked at trading costs of both value and momentum strategies, and found previous studies had estimated trading costs far higher than they actually were.
The fact that fund managers employing algorithmic momentum strategies suffer occasional dramatic losses suggests these managers either cannot anticipate momentum crashes or lack the incentives to take actions to avoid crashes.
Hence, they considered time-series momentum strategies to be of greater importance than the cross-section momentums.
(2005) wrote a paper "Global Momentum Strategies: A Portfolio Perspective".
As per Conrad and Kaul (1998), the profitability of momentum strategies is due to cross-sectional variation in expected returns rather than predictable time-series variation in security returns.