Eugene Fama (the father of the efficient markets hypothesis): Here’s historical evidence that momentum trading doesn’t work.

Posted on January 11, 2010 by Chris F. Masse

New York Times: What the Past Can’t Tell Investors

I am linking to the story so as to create an opportunity for commenting, below.

About Chris F. Masse

Founder and President of Midas Oracle
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5 Responses to Eugene Fama (the father of the efficient markets hypothesis): Here’s historical evidence that momentum trading doesn’t work.

  1. Jason Ruspini says:
    January 11, 2010 at 7:13 PM

    Finding one definition of momentum that doesn’t work doesn’t mean that momentum doesn’t work. If you switch to daily data and use a range of lookbacks with a range of markets, you will find that performance tends to improve over passive positions, even after transaction costs are accounted for.

    A momentum variation that has worked is here:
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461

    Sustained, profitable momentum trading suggests that either information takes time to find its way into the market, or that traders are trading on past prices, i.e. “feedback trading”:
    http://www.midasoracle.org/2009/11/30/robin-hanson-manipulations-prediction-markets/

  3. Niall O'Connor says:
    January 12, 2010 at 9:09 AM

    Model now sees stocks heading south for the next two weeks; not least the resource stocks such as VED and XTA etc …

  4. Caveat Bettor says:
    January 14, 2010 at 8:34 AM

    A couple of points: First, if the market is totally efficient, then alpha = 0. I think hindsight analysis pretty much shows that alpha > 0. Second, while momentum strategies tend to have higher volatility, they are also more leptokurtotic (think jLo), so the upside is higher than reversion strategies where you are catching the falling knives. My trading strategies are fairly agnostic along this line, but if I had to choose one, I would choose momentum (with special hedging) over reversion.

  5. Niall O'Connor says:
    January 21, 2010 at 12:01 PM

    “Model now sees stocks heading south for the next two weeks; not least the resource stocks such as VED and XTA etc …”

    And, what has happened – the market has headed south (down 400 points in two days) and the resource stocks have been hammered…….

    So, what does this tell us?

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