Federal Reserve Bank of Chicago
Institutional Affiliation: Federal Reserve Bank of Chicago
Information about this author at RePEc
NBER Working Papers and Publications
|November 2014||Momentum Trading, Return Chasing, and Predictable Crashes|
with Eric Ghysels, Ravi Jagannathan: w20660
We combine self-collected historical data from 1867 to 1907 with CRSP data from 1926 to 2012, to examine the risk and return over the past 140 years of one of the most popular mechanical trading strategies — momentum. We find that momentum has earned abnormally high risk-adjusted returns — a three factor alpha of 1 percent per month between 1927 and 2012 and 0.5 percent per month between 1867 and 1907 — both statistically significantly different from zero. However, the momentum strategy also exposed investors to large losses (crashes) during both periods. Momentum crashes were predictable — more likely when momentum recently performed well (both eras), interest rates were relatively low (1867–1907), or momentum had recently outperformed the stock market (CRSP era) — times when borrowing or...