t+2 return), all stocks that did not trade between t and t+1 will have to be
excluded from the portfolio. This difference is one potential explanation for
the absence of contrarian profits above the horizon of one year.
The results are illustrated in Figure 5. The pattern of momentum profits is
clearly evident and of comparable size to those reported when the analysis is
conducted using individual stocks. This is a particularly interesting result as it
demonstrates that momentum profits persist despite the reduction of cross-
sectional variability to nine portfolios. This results suggests strongly that
momentum is attributable to a systemic factor rather than to idiosyncratic
variation in stock returns. It is also interesting to note that the momentum
profits illustrated in Figure 5 exist over the entire spectrum of holding period
returns. There is therefore no evidence at all to support a contrarian
investment strategy in size portfolios.
Size Band |
Number of Stocks |
Top 100 |
97 |
100-200 |
98 |
200-300 |
96 |
300-400 |
94 |
400-500 |
92 |
500-600 |
89 |
600-700 |
87 |
700-800 |
83 |
800-900 |
76 |
Table 2 Average number of stocks by size cohort.
Finally, the pattern of momentum over time is illustrated in Figure 6 which
shows the difference between the winners returns and losers returns as well as
a 24 month moving average smoother. Momentum strongest in early 80s and
late 90s and this trend continues in the early 2000s. Interestingly enough, this
pattern is consistent with the conjecture that there is not a simple
relationship between momentum profits and periods of strong economic
growth.
12
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