Myths of Momentum | Momentum Trading Strategies | Quantra Courses

This video is the preview of our course on Momentum Trading Strategies.
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Timestamp:
00:11 - 02:42 - Common myths

Welcome to this video lesson on myths of momentum.
After completing this, you will be able to list and explain common myths related to momentum. The common myths of momentum are shown on the screen.

The first myth is momentum returns are small and sporadic Critics of momentum investing have always tried to downplay its effectiveness.
You will find that momentum can last from as little as days to as long as years.

According to research by the Journal of Portfolio Management, Momentum investing was the most profitable. It beat the following strategies:
RMRF: A portfolio of all stocks in the market minus the risk-free interest rate
SMB: Going long on small stocks and short on big stocks
HML: Going long on high book-to-price stocks and short low book-to-price stocks Mom is momentum investing which goes long stocks with high past year returns.

And short stocks with low past year returns. You can clearly see that momentum is more consistent than other styles of investing.

The second myth is momentum is only on the short side. It is generally believed that momentum beats a long-only investor due to more bets on the short side returns.

To check if this was true, the momentum strategy was split into two categories, going long on winners and going short on losers.

What do you think the results would be?
The results showed that both long side returns and short side returns contribute equally to the momentum strategy.
Contrary to myth, the long side is more profitable than the short side.

The third myth is momentum is stronger in small caps than large caps It turns out that the returns from small caps are larger than the returns from large caps.
But the magnitude is exaggerated.

The next myth is if everyone knows about momentum, you cannot profit from it You must be thinking that if research says that omentum always wins, traders will latch on to it. And if everybody knows a secret, then there is no secret, hence, no gains.

One of the famous papers on momentum was done by Jegadeesh and Titman in 1993.
Jegadeesh and Titman had a testing period from 1965 to 1990.
Hence, HIMCO tried the momentum strategy on Russell 3000 in two parts.

One part was the period 1927 to 1965. Another was 1990 to 2016. It seemed that the returns from the momentum strategy were almost similar.

In the next section, you will learn the herding effect, which is one of the reasons that causes momentum.


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