Chapter 10
MOMENTUM
Narasimhan Jegadeesh and Sheridan Titman
A growing bodyof literature documents evidence of stock return pre-
dictability based on a variety of firm-specific variables. Among these
anomalies, the price momentum effect is probably the most difficult to ex-
plain within the context of the traditional risk-based asset pricing para-
digm. For example, Jegadeesh and Titman (1993) show that stocks that
perform the best (worst) over a three- to twelve-month period tend to con-
tinue to perform well (poorly) over the subsequent three to twelve months.
The best performers appear to be less risky than the worst performers.
Therefore, standard risk adjustments tend to increase rather than decrease
the return spread between past winners and past losers. Moreover, as we
show in figure 10.1, the returns of a zero cost portfolio with a long posi-
tion in past winners and a short position in past losers makes money in
every five-year period since 1940. It is difficult to develop a risk-based the-
ory to explain the evidence that the past winners almost always outper-
form past losers.
Practitioners in the money management industry are aware of the mo-
mentum effect and it appears that they at least screen stocks based on
price momentum. For example, Grinblatt, Titman, and Wermers (1995)
and Chan, Jegadeesh, and Wermers (2000) find that mutual funds tend
to buy past winners and sell past losers. Also, Womack (1996) and Je-
gadeesh, Kim, Krische, and Lee (2003), among others, report that analysts
generally recommend high-momentum stocks more favorably than low-
momentum stocks. However, despite the popularity of momentum strategies
in the investment community and its visibility in the academic community,
there is no evidence of the effect disappearing. Jegadeesh and Titman
(2001) show that momentum strategies are profitable in the nineties as well,
which is a period subsequent to the sample period in Jegadeesh and Titman
(1993).
The momentum strategies are also profitable outside the United States.
For example, Rouwenhorst (1998) reports that the momentum strategies
examined by Jegadeesh and Titman (1993) for the U.S. market are also
profitable in the European markets. Indeed, Japan is the only large developed
stock market that does not exhibit momentum (see, Chui, Titman, and Wei
2000). Momentum strategies implemented on samples consisting of stocks