Christopher Geczy, University of Pennsylvania, and Mikhail Samonov, Octoquant.com, recently published the world’s longest backtest on momentum (1801 - 2012). This is a truly fascinating white paper. So much of the testing on momentum has been done on the CRSP database of U.S. Securities which goes back to 1926. Now, we can get a much longer-term perspective on the performance of momentum investing.
Abstract:
We assemble a dataset of U.S. security prices between 1801 and 1926, and create an out-of-sample test of the price momentum strategy, discovered in the post-1927 data. The pre-1927 momentum profits remain positive and statistically significant. Additional time series data strengthens the evidence that momentum is dynamically exposed to market beta, conditional on the sign and duration of the tailing market state. In the beginning of each market state, momentum’s beta is opposite from the new market direction, generating a negative contribution to momentum profits around market turning points. A dynamically hedged momentum strategy significantly outperforms the un-hedged strategy.
Yep, momentum worked then too! As pointed out in the white paper, those looking for a return factor that outperforms every single year will not find it with price momentum (or any other factor), but momentum has a long track record of generating excess returns.
So much for the theory that ideas in investing tend to streak, get overinvested, then die. Some, like momentum (or value), go in an out of favor, but they have generated very robust returns over long periods of time.
HT: Abnormal Returns and Turnkey Analyst
Past performance is no guarantee of future returns.
