Momentum Crashes
Structures and characteristics that underline the periods of poor momentum performance
- 44 pages
- English
- PDF
- Available on iOS & Android
Momentum Crashes
Structures and characteristics that underline the periods of poor momentum performance
About this book
Bachelor Thesis from the year 2013 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1, 7, University of Mannheim, language: English, abstract: This paper focuses on the structures and characteristics that underlie the periods of extremely poor momentum performance and sets a special focus on the latest 2009 momentum crash period. It answers questions regarding the momentum portfoliocomposition during this period and quantitatively evaluates the momentum portfolio, measuring commonly applied performance indicators. The results are then contrasted with a non-crash benchmark period.The momentum strategy is a simple yet powerful trading strategy. Momentum implies that past stock prices can predict future stock price development. According to momentum theory, past winner stocks are likely to continue their good performancewhile past loser stocks are likely to continue to perform poorly. Hence, applying this strategy, investors buy stocks that have risen in the past the strongest and (short) sell those that have declined in value the most. This very simple decision rule is practically the only important guideline to follow regarding the momentum strategy. Surprisingly and in spite of its simplicity, momentum works and yields high excess returns. Over the 1927 to 2012 period, the portfolio of past winner stocks yields an annualized excess return of 7.157% compared to the market portfolio. Even though momentum usually performs exceptionally well, it does not offer free lunch. In the 1927 to 2012 time frame, there are a few periods of extreme momentum underperformance that could have wiped out some significant wealth. For instance, during the most recent 2009 momentum crash, this strategy would have erased 104.28% of an initial investment in just 3 months.
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