The Fading Abnormal Returns of Momentum Strategies

We find increasingly large variations in returns from momentum strategies in recent years. Momentum strategies did not earn significant excess returns during the period of 1993-2004 which was due to their poor performance over the period from 2001-2004. Using sub-samples of smaller capitalization stocks increases momentum portfolio returns and reduces return volatity. We also evaluate momentum portfolios that are formed prior to the end of month portfolio formation universally used in the academic literature. Consistent with institutional momentum trading affecting end of month returns and volatility, we find that 'front-running' a momentum strategy generates similar, but less volatile returns than following a month-end strategy.