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The Journal of Wealth Management

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Article

Where Has the Trend Gone? An Update on Momentum Returns in the U.S. Stock Market

Steven Dolvin and Bryan Foltice
The Journal of Wealth Management Fall 2017, 20 (2) 29-40; DOI: https://doi.org/10.3905/jwm.2017.20.2.029
Steven Dolvin
is a professor of finance in the Lacy School of Business at Butler University in Indianapolis, IN. sdolvin@butler.edu
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Bryan Foltice
is an assistant professor of finance in the Lacy School of Business at Butler University in Indianapolis, IN. bfoltice@butler.edu
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Abstract

Prior studies have found broad-based support for the efficacy of trading strategies based on momentum in stock returns. More recent studies, however, have noted a declining benefit relative to that identified in seminal studies on momentum. These recent studies, however, primarily examined time periods ending prior to or immediately following the 2008 financial crisis. Thus, we extend this line of research by exploring the profitability of momentum trading in the U.S. equity markets over the broader 1986 to 2015 time period. Our results for the earlier part of our sample period (i.e., 1986–2006) fall in line with previous studies, as we find a monotonic relationship between decile portfolios formed based on their prior six-month performance and subsequent twelve-month holding period excess returns. In contrast, when we evaluate more recent periods (i.e., 2007–2015 and 2010–2015), we find dramatically different results. In particular, alphas for the winner portfolio, which have historically been the highest, are actually negative during both subperiods. Furthermore, the curvature of the recent portfolio return distribution is clearly no longer monotonic. Rather, it follows a more inverted U-shaped curve from the winner portfolio (P1) to the loser (P10) portfolio, with excess returns cresting around the fifth decile portfolio (P5). In fact, we find that the risk-adjusted returns of the winner portfolio (P1) are significantly less than those of the middle portfolio (P5) for both recent subperiods. These results suggest that individual and institutional investors seeking to profit from traditionally based momentum trading strategies may need to rethink their approaches.

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The Journal of Wealth Management: 20 (2)
The Journal of Wealth Management
Vol. 20, Issue 2
Fall 2017
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Where Has the Trend Gone? An Update on Momentum Returns in the U.S. Stock Market
Steven Dolvin, Bryan Foltice
The Journal of Wealth Management Jul 2017, 20 (2) 29-40; DOI: 10.3905/jwm.2017.20.2.029

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Where Has the Trend Gone? An Update on Momentum Returns in the U.S. Stock Market
Steven Dolvin, Bryan Foltice
The Journal of Wealth Management Jul 2017, 20 (2) 29-40; DOI: 10.3905/jwm.2017.20.2.029
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  • Article
    • Abstract
    • METHODOLOGY
    • OVERALL RESULTS (1986–2015)
    • PRE– AND POST–FINANCIAL CRISIS RESULTS
    • ROBUSTNESS CHECKS
    • DISCUSSION AND CONCLUSION
    • REFERENCES
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Cited By...

  • INVITED EDITORIAL COMMENT: Taking Stationarity Seriously
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More in this TOC Section

  • Editor’s Letter
  • Book Review: Wealth of Wisdom: The Top 50 Questions Wealthy Families Ask
  • The Tax Benefits of Relaxing the Long-Only Constraint: Do They Come from Character or Deferral?
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