Work

Are Momentum Profits Robust to Trading Costs?

Year: 2004

Type: article

Abstract: ABSTRACT We test whether momentum strategies remain profitable after considering market frictions induced by trading. Intraday data are used to estimate alternative measures of proportional and non‐proportional (price impact) trading costs. The price impact models imply that abnormal returns to portfolio strategies decline with portfolio size. We calculate break‐even fund sizes that lead to zero abnormal returns. In addition to equal‐ and value‐weighted momentum strategies, we derive a liquidity‐weighted strategy designed to reduce the cost of trades. Equal‐weighted strategies perform the best before trading costs and the worst after trading costs. Liquidity‐weighted and hybrid liquidity/value‐weighted strategies have the largest break‐even fund sizes: $5 billion or more (relative to December 1999 market capitalization) may be invested in these momentum strategies before the apparent profit opportunities vanish.

Source: The Journal of Finance

DOI: 10.1111/j.1540-6261.2004.00656.x

Authors: Robert A. Korajczyk, Ronnie Sadka

Institutions: Northwestern University, University of Vienna, University of Washington, London School of Economics and Political Science

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3123921709

FWCI: 36.82

Cites: 53

Cited by: 582

Related to: 10