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Investment momentum: A two‐dimensional behavioural strategy

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  • Fangming Xu
  • Huainan Zhao
  • Liyi Zheng
Abstract
We propose an investment‐momentum strategy of buying past winners with low investment and selling past losers with high investment, which simultaneously exploits two dimensions of market inefficiencies. The new strategy generates twice the monthly returns earned by either the price momentum or investment strategy (1.44% vs. 0.75% or 0.61%). Despite the diminishing anomalies in recent decades, the investment‐momentum stays persistent. The mispricing‐based strategy performs better in periods of high investor sentiment or for stocks with high limits‐to‐arbitrage, which is consistent with our expectations. Overall, we show that one can simultaneously use multiple dimensions of market inefficiency to attain superior performance.

Suggested Citation

  • Fangming Xu & Huainan Zhao & Liyi Zheng, 2022. "Investment momentum: A two‐dimensional behavioural strategy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1191-1207, January.
    • Handle: RePEc:wly:ijfiec:v:27:y:2022:i:1:p:1191-1207
    DOI: 10.1002/ijfe.2208
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