Research Details

Abstract

We test whether momentum-based strategies remain profitable after considering market frictions induced by trading. Intra-day data are used to estimate alternative measures of proportional (spread) and non-proportional (price impact) trading costs. A cross-sectional model of the relation between trading costs and firm characteristics is used to predict costs out-of-sample. The price impact models imply that abnormal returns to portfolio strategies decline with portfolio size. We calculate break-even fund sizes which lead to zero abnormal returns. In addition to commonly studied equal- and value-weighted momentum strategies, we derive a liquidity-weighted strategy designed to reduce the cost of trades. Equal-weighted strategies perform the best before trading costs and the worst after trading costs. Liquidity-weighted and hybrid liquidity/value-weighted strategies have the largest break-even fund sizes: conservatively, $5 billion or more (relative to December 1999 market capitalization) may be invested in these momentum-based strategies before the apparent profit opportunities vanish.

Type

Article

Author(s)

Robert Korajczyk, Ronnie Sadka

Date Published

2004

Citations

Korajczyk, Robert, and Ronnie Sadka. 2004. Are Momentum Profits Robust to Trading Costs?. Journal of Finance.(3): 1039-1082.