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Working Paper
The Performance of International Equity Portfolios
This paper evaluates the performance of U.S. investors' portfolios in the equities of over 40 countries over a 25-year period. We find that these portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We uncover three potential reasons for this success. First, U.S. investors abstained from momentum trading and instead sold past winners. Second, conditional performance tests provide no evidence that the superior (unconditional) performance owed to private information, suggesting that the successful exploitation of publicly available information ...
Working Paper
Cross-Sectional Factor Dynamics and Momentum Returns
This paper proposes and implements an inter-temporal model wherein aggregate consumption and asset-specific dividend growths jointly move with two mean-reverting state variables. Consumption beta varies through time and cross sectionally due to variation in half-lives and stationary volatilities of the dividend signals. Winner (Loser) stocks exhibit high (low) half-lives and stationary volatilities, and thus exhibit high (low) consumption beta commanding high (low) risk-premium. The model also rationalizes the "momentum crashes" phenomenon discussed in Daniel and Moskowitz (2014). High ...
Working Paper
Momentum Trading, Return Chasing and Predictable Crashes
We combine self-collected historical data from 1867 to 1907 with CRSP data from 1926 to 2012, to examine the risk and return over the past 140 years of one of the most popular mechanical trading strategies ? momentum. We find that momentum has earned abnormally high risk-adjusted returns ?a three factor alpha of 1 percent per month between 1927 and 2012 and 0.5 percent per month between 1867 and 1907 ? both statistically significantly different from zero. However, the momentum strategy also exposed investors to large losses (crashes) during both periods. Momentum crashes were predictable ? ...
Working Paper
Cash-Hedged Stock Returns
Corporate cash piles vary across companies and over time. A firm's cash holding is an implicit position in a low-return asset that is correlated across firms. Cash generates variation in beta estimates. We show how investors can hedge out the cash on firms' balance sheets when making portfolio choices. We decompose stock betas into components that depend on the firm's cash holding, return on cash, and cash-hedged return. Common asset pricing premia — size, value, and momentum — have large implicit cash positions. Portfolios of cash-hedged premia often have higher Sharpe ratios because ...
Working Paper
Retail Investors’ Contrarian Behavior Around News, Attention, and the Momentum Effect
Using a large panel of U.S. brokerage accounts trades and positions, we show that a large fraction of retail investors trade as contrarians after large earnings surprises, especially for loser stocks, and that such contrarian trading contributes to post earnings announcement drift (PEAD) and price momentum. Indeed, when we double-sort by momentum portfolios and retail trading flows, PEAD and momentum are only present in the top two quintiles of retail trading intensity. Finer sorts confirm the results, as do sorts by firm size and institutional ownership level. We show that the investors in ...