Are momentum profits robust to trading costs?

Robert A. Korajczyk, Ronnie Sadka

Research output: Contribution to journalArticlepeer-review

263 Scopus citations

Abstract

We test whether momentum strategies remain profitable after considering market frictions induced by trading. Intraday data are used to estimate alternative measures of proportional and non-proportional (price impact) trading costs. The price impact models imply that abnormal returns to portfolio strategies decline with portfolio size. We calculate break-even fund sizes that lead to zero abnormal returns. In addition to equal- and value-weighted momentum strategies, we derive a liquidity-weighted strategy designed to reduce the cost of trades. Equal-weighted strategies perform the best before trading costs and the worst after trading costs. Liquidity-weighted and hybrid liquidity/value-weighted strategies have the largest break-even fund sizes: $5 billion or more (relative to December 1999 market capitalization) may be invested in these momentum strategies before the apparent profit opportunities vanish.

Original languageEnglish (US)
Pages (from-to)1039-1082
Number of pages44
JournalJournal of Finance
Volume59
Issue number3
DOIs
StatePublished - Jun 1 2004

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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