Document Type

Journal Article

Department/ Unit

Department of Economics

Abstract

This paper applies recent econometric tests of stochastic dominance to examine an enduring puzzle in finance: the momentum effect in stock returns (J. Finance 48 (1993) 65). We use stochastic dominance tests to distinguish between the hypothesis that there exists general asset pricing models that can explain momentum versus the alternative hypothesis that there are no asset pricing models consistent with risk-averse investors that can rationalize that effect. Using stock index data for 24 countries over the period 1989–2001, we show that winner portfolios stochastically dominate loser portfolios at second and third order. These results are robust to two subperiods with different risk and return characteristics and survive reasonable transaction costs for international index funds. Our results indicate that the search for rational asset pricing explanations for the momentum effect may be a futile one.

Publication Year

2005

Journal Title

Journal of Financial Markets

Volume number

8

Issue number

1

Publisher

Elsevier

First Page (page number)

89

Last Page (page number)

109

Referreed

1

DOI

10.1016/j.finmar.2004.08.001

ISSN (print)

1386-4181

Link to Publisher’s Edition

http://dx.doi.org/10.1016/j.finmar.2004.08.001

Keywords

Stochastic dominance, Utility analysis, Momentum

Included in

Economics Commons

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