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Investment momentum: A two‐dimensional behavioural strategy
Author(s) -
Xu Fangming,
Zhao Huainan,
Zheng Liyi
Publication year - 2022
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.2208
Subject(s) - inefficiency , momentum (technical analysis) , economics , investment (military) , investment strategy , arbitrage , trading strategy , exploit , monetary economics , financial economics , econometrics , microeconomics , computer science , computer security , politics , political science , market liquidity , law
We propose an investment‐momentum strategy of buying past winners with low investment and selling past losers with high investment, which simultaneously exploits two dimensions of market inefficiencies. The new strategy generates twice the monthly returns earned by either the price momentum or investment strategy (1.44% vs. 0.75% or 0.61%). Despite the diminishing anomalies in recent decades, the investment‐momentum stays persistent. The mispricing‐based strategy performs better in periods of high investor sentiment or for stocks with high limits‐to‐arbitrage, which is consistent with our expectations. Overall, we show that one can simultaneously use multiple dimensions of market inefficiency to attain superior performance.