Three essays on momentum

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Essay 1, Growth/Value, Market-Cap, and Momentum, examines the profitability of style momentum strategies on portfolios based on firm growth/value characteristics and market capitalization. We use monthly total returns of nine S&P style indices to avoid concerns about firm size, liquidity, credit risk, short-sale constraints, and transaction costs. We find that historically buying a past best performing style index and short-selling a past worst performing style index generates economically and statistically significant profit of 0.8% per month over the period June 1995 to March 2009. This profitability remains economically plausible after adjusting for systematic risk, short-sale costs, and transaction costs. Investors may actually implement style momentum strategies on exchange traded funds linked to the S&P style indices. Essay 2, Sector Momentum, examines monthly returns of nine Select Sector SPDRs and finds historically buying past outperforming sectors and selling past underperforming sectors produces economically and statistically significant profits. Investors may be able to not only benefit from SPDRs' low fees, tax efficiency, and trading flexibility, but also exploit SPDRs as asset allocation tools to earn excess returns on sector momentum. For robustness checks, I test sector momentum investing strategies on CRSP listed individual stocks between January 1963 and December 2008 using Global Industry Classifications Standard (GICS) and also find statistically significant payoffs. Essay 3, Momentum Strategies on Global ETFs, examines the price momentum on 15 well-diversified iShares MSCI Country Index ETFs from April 1996 to December 2006. I find statistically and economically significant profits for some momentum strategies: long past winners and short past losers. The results are robust to trading costs and excessive risks.

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Economics, Finance