DP15857 Short-term Momentum

Author(s): Mamdouh Medhat, Maik Schmeling
Publication Date: February 2021
Keyword(s): bounded rationality, Momentum, reversal, trading volume
JEL(s): G12, G14
Programme Areas: Financial Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15857

We document a striking pattern in U.S. and international stock returns: Double sorting on last month's return and share turnover reveals significant short-term reversal among low-turnover stocks whereas high-turnover stocks exhibit short-term momentum. Short-term momentum is as profitable and as persistent as conventional price momentum. It also survives transaction costs and is strongest among the largest, most liquid, and most extensively covered stocks. Our results are difficult to reconcile with models imposing strict rationality but are suggestive of an explanation based on some traders underappreciating the information in prices.