Monday, January 10, 2011

Momentum in stock returns

When a stock that has risen in the past continues to rise, we call it momentum.   Momentum is a bit of a problem for the Efficient Market Hypothesis because it implies a profitable trading rule -  "buy recent winners".

Recent academic studies have found support for momentum effects even after controlling for risk, data mining biases and trading costs.   The Economist has a really nice article on the current state of what we know about momentum.  Well worth a read.