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Is Momentum Due to Data-Snooping?

Author

Listed:
  • Ericsson, Johan

    (Dept. of Economic Statistics, Stockholm School of Economics)

  • González, Andrés

    (Dept. of Economic Statistics, Stockholm School of Economics)

Abstract
This paper explores the profitability of portfolio-based momentum strategies. The data consists of all NYSE, AMEX, and NASDAQ stocks on the CRSP database. The analysis considers the period July 1963 to December 2002 and the tests are performed on portfolios formed on industry, size and book-to-market. The departure from earlier studies lies in the way we test for profitability. To avoid the serious problem of data-snooping we apply the procedure provided by White (2000). Overall, we find strong evidence of a momentum effect where an investor takes a long position on the winner portfolio and a short position on the loser portfolio. Hence, we reject the hypothesis of weak market efficiency. Splitting the sample in two parts, 1963:07 to 1981:12 and 1982:01 to 2002:12 we found that the best momentum strategy was profitable during the first period and not during the second. The overall significance is thus driven by events in the earlier part of the sample and it appears that the market has become more efficient.

Suggested Citation

  • Ericsson, Johan & González, Andrés, 2003. "Is Momentum Due to Data-Snooping?," SSE/EFI Working Paper Series in Economics and Finance 536, Stockholm School of Economics.
    • Handle: RePEc:hhs:hastef:0536
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    References listed on IDEAS

    as
    1. Hansen, Peter Reinhard, 2005. "A Test for Superior Predictive Ability," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 365-380, October.
    2. Lo, Andrew W & MacKinlay, A Craig, 1990. "Data-Snooping Biases in Tests of Financial Asset Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 431-467.
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    8. Narasimhan Jegadeesh & Sheridan Titman, 2001. "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations," Journal of Finance, American Finance Association, vol. 56(2), pages 699-720, April.
    9. repec:bla:jfinan:v:53:y:1998:i:1:p:267-284 is not listed on IDEAS
    10. Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, vol. 68(5), pages 1097-1126, September.
    11. Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. "Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
    12. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Teplova, Tamara & Mikova, Evgeniya & Nazarov, Nikolai, 2017. "Stop losses momentum strategy: From profit maximization to risk control under White’s Bootstrap Reality Check," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 240-258.
    2. Jungmu Kim & Yuen Jung Park, 2019. "Is Factor Investing Sustainable after Price Impact Costs? The Capacity of Factor Investing in Korea," Sustainability, MDPI, vol. 11(17), pages 1-21, September.
    3. Badreddine, Sina & Galariotis, Emilios C. & Holmes, Phil, 2012. "The relevance of information and trading costs in explaining momentum profits: Evidence from optioned and non-optioned stocks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 589-608.

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    More about this item

    Keywords

    Momentum; Data-snooping; Bootstrap;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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