A Trade-based Analysis of Momentum

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

This article uses transactions data for all NYSE/AMEX stocks in the period 1983-2002 to study how investors trade in Jegadeesh and Titman's (1993) momentum portfolios. Among small trades, there is an extremely sluggish reaction to the past returns. For instance, an initial small-trade buying pressure exists for loser stocks, and it gradually converts into an intense selling pressure over the following year. The results are consistent with initial underreaction followed by delayed reaction among small traders. Moreover, small-trade imbalances during the formation period significantly affect momentum returns, suggesting that underreaction among small traders contributes to the momentum effect. Large traders, by contrast, show no evidence of underreaction, and large-trade imbalances have little impact on subsequent returns. Overall, the results suggest that momentum could partly be driven by the behavior of small traders.
Original languageEnglish
JournalReview of Financial Studies
Volume19
Issue number2
Pages (from-to)457-491
Number of pages35
ISSN0893-9454
DOIs
Publication statusPublished - Jun 2006
Externally publishedYes

Cite this

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title = "A Trade-based Analysis of Momentum",
abstract = "This article uses transactions data for all NYSE/AMEX stocks in the period 1983-2002 to study how investors trade in Jegadeesh and Titman's (1993) momentum portfolios. Among small trades, there is an extremely sluggish reaction to the past returns. For instance, an initial small-trade buying pressure exists for loser stocks, and it gradually converts into an intense selling pressure over the following year. The results are consistent with initial underreaction followed by delayed reaction among small traders. Moreover, small-trade imbalances during the formation period significantly affect momentum returns, suggesting that underreaction among small traders contributes to the momentum effect. Large traders, by contrast, show no evidence of underreaction, and large-trade imbalances have little impact on subsequent returns. Overall, the results suggest that momentum could partly be driven by the behavior of small traders.",
author = "S{\o}ren Hvidkj{\ae}r",
year = "2006",
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doi = "10.1093/rfs/hhj016",
language = "English",
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A Trade-based Analysis of Momentum. / Hvidkjær, Søren.

In: Review of Financial Studies, Vol. 19, No. 2, 06.2006, p. 457-491.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

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AU - Hvidkjær, Søren

PY - 2006/6

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N2 - This article uses transactions data for all NYSE/AMEX stocks in the period 1983-2002 to study how investors trade in Jegadeesh and Titman's (1993) momentum portfolios. Among small trades, there is an extremely sluggish reaction to the past returns. For instance, an initial small-trade buying pressure exists for loser stocks, and it gradually converts into an intense selling pressure over the following year. The results are consistent with initial underreaction followed by delayed reaction among small traders. Moreover, small-trade imbalances during the formation period significantly affect momentum returns, suggesting that underreaction among small traders contributes to the momentum effect. Large traders, by contrast, show no evidence of underreaction, and large-trade imbalances have little impact on subsequent returns. Overall, the results suggest that momentum could partly be driven by the behavior of small traders.

AB - This article uses transactions data for all NYSE/AMEX stocks in the period 1983-2002 to study how investors trade in Jegadeesh and Titman's (1993) momentum portfolios. Among small trades, there is an extremely sluggish reaction to the past returns. For instance, an initial small-trade buying pressure exists for loser stocks, and it gradually converts into an intense selling pressure over the following year. The results are consistent with initial underreaction followed by delayed reaction among small traders. Moreover, small-trade imbalances during the formation period significantly affect momentum returns, suggesting that underreaction among small traders contributes to the momentum effect. Large traders, by contrast, show no evidence of underreaction, and large-trade imbalances have little impact on subsequent returns. Overall, the results suggest that momentum could partly be driven by the behavior of small traders.

U2 - 10.1093/rfs/hhj016

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