Detection of momentum effects using an index out-performance strategy (with N. Meade), Quantitative Finance, vol. 11, 2011, pp313-326
The literature shows a substantial portion of momentum profits come from illiquid investments and short-selling, entailing abnormal transaction costs. Concentrating on liquid long-only investments, we investigate momentum using index out-performance portfolio selection (via a modified Sortino ratio) from universes defined by 11 S&P international equity indices. The probability a stock out-performed its index for n weeks, conditional on out-performance during the preceding year, successfully predicts momentum effects, allowing partition of the indices into those exhibiting strong, weak or no evidence of momentum. We find evidence of significant momentum profits (including reasonable transaction costs) in seven indices. Comparable conventional momentum analysis found significant profits for one index.
Keywords: Index tracking; Portfolio optimization; Portfolio allocation; Portfolio analysis; Portfolio constraints; Portfolio management; Portfolio theory