Maybe you have asked yourself in the past why the momentum factor is defined as 12-1 month returns where the return of the last 12 months is reduced by the return in the previous month.
And having only skimmed the research, one wonders where the national differences in the importance of salience comes from. Is the Gamestop phenomenon dependent on Crameresque figures, preaching from the pulpit of the Church of What's Happening Now? Financial social media? Bank advisors?
In any case, it's no surprise that recent gains beget short-term future gains. We live in a shooting star economy, where every company (potentially) has its 15 minutes of fame.
This might fall into the category of old saws about the press: "If it bleeds it leads", or "man bites dog stories are a lot more interesting than dog bites man stories". I've always chuckled to myself how amongst finance professionals and investors, stocks "go up" or "go down", perhaps with a modifier "a lot" depending on the severity, but in the press, stocks only ever "plunge" or "soar". I've also noticed something that's crept into press coverage of stocks over the last few years that was never used in my early days in the business: "Stock XYZ was -5% in yesterday's trading, the most in 14 months." I have never been able to figure out why, having been unremarkable for decades, this is suddenly worthy of comment, especially because that historic volatility is never de-constructed to back out the impact of a sector or market pull-back. I think they only do it only because that statistic is now more accessable.
When I was a young analyst, I once had a buy rating on a stock which was bid for and the stock was +25% in one day. An older salesperson said to me "you can't take credit for that outperformance, because that's M&A!" I replied "so in your eyes, only if it've ground up +1% a month for two years would I have been a hero?" People are weird.
There may also be bias caused by computer program trading. We've all heard of "stop losses", but I've never heard of "stop gains". I always found this asymmetry interesting, as I'm convinced top-slicing winners and back-filling high-conviction laggards is a winning strategy, as opposed to just letting winning positions ride until they eventually have a down day which turns everyone into panic sellers. Perhaps "FOMO" is a stronger emotion than "patiently harvest your gains".
This is a very interesting writeup, thanks for bringing it to our attention. In general though I am a bit skeptical of research that takes an existing strategy and shows that it can be made more profitable (or restored to profitability) with a simple tweak. If you make a single random change to a strategy there is a roughly 50% a priori chance that the profitability will increase. Which falls far short to conventional criteria of statistical significance. It is too easy to fix things up retrospectively with a few artful changes.
Excellent!
And having only skimmed the research, one wonders where the national differences in the importance of salience comes from. Is the Gamestop phenomenon dependent on Crameresque figures, preaching from the pulpit of the Church of What's Happening Now? Financial social media? Bank advisors?
In any case, it's no surprise that recent gains beget short-term future gains. We live in a shooting star economy, where every company (potentially) has its 15 minutes of fame.
This might fall into the category of old saws about the press: "If it bleeds it leads", or "man bites dog stories are a lot more interesting than dog bites man stories". I've always chuckled to myself how amongst finance professionals and investors, stocks "go up" or "go down", perhaps with a modifier "a lot" depending on the severity, but in the press, stocks only ever "plunge" or "soar". I've also noticed something that's crept into press coverage of stocks over the last few years that was never used in my early days in the business: "Stock XYZ was -5% in yesterday's trading, the most in 14 months." I have never been able to figure out why, having been unremarkable for decades, this is suddenly worthy of comment, especially because that historic volatility is never de-constructed to back out the impact of a sector or market pull-back. I think they only do it only because that statistic is now more accessable.
When I was a young analyst, I once had a buy rating on a stock which was bid for and the stock was +25% in one day. An older salesperson said to me "you can't take credit for that outperformance, because that's M&A!" I replied "so in your eyes, only if it've ground up +1% a month for two years would I have been a hero?" People are weird.
There may also be bias caused by computer program trading. We've all heard of "stop losses", but I've never heard of "stop gains". I always found this asymmetry interesting, as I'm convinced top-slicing winners and back-filling high-conviction laggards is a winning strategy, as opposed to just letting winning positions ride until they eventually have a down day which turns everyone into panic sellers. Perhaps "FOMO" is a stronger emotion than "patiently harvest your gains".
This is a very interesting writeup, thanks for bringing it to our attention. In general though I am a bit skeptical of research that takes an existing strategy and shows that it can be made more profitable (or restored to profitability) with a simple tweak. If you make a single random change to a strategy there is a roughly 50% a priori chance that the profitability will increase. Which falls far short to conventional criteria of statistical significance. It is too easy to fix things up retrospectively with a few artful changes.