Allow me to finish this: MOMENTUM: In finance, momentum is the empirically observed tendency for rising asset prices to rise further. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month (Jegadeesh and Titman, 1993, 1999). The existence of momentum is a market anomaly, which finance theory struggles to explain. The difficulty is that an increase in asset prices, in and of itself, should not warrant further increase. Such increase, according to the efficient-market hypothesis, is warranted only by changes in demand and supply or new information (cf. fundamental analysis). Students of financial economics have largely attributed the appearance of momentum to cognitive biases, which belong in the realm of behavioral economics. The explanation is that investors are irrational (Daniel, Hirschleifer, and Subrahmanyam, 1998 and Barberis, Shleifer, and Vishny, 1998), in that they underreact to new information by failing to incorporate news in their transaction prices. However, much as in the case of price bubbles, recent research has argued that momentum can be observed even with perfectly rational traders (Crombez, 2001). EFFICIENT MARKET HYPOTHESIS: In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made. COGNITIVE BIAS (under Psychology) A cognitive bias is a pattern of deviation in judgment that occurs in particular situations. Implicit in the concept of a "pattern of deviation" is a standard of comparison; this may be the judgment of people outside those particular situations, or may be a set of independently verifiable facts. SOO??? "In finance, momentum is the empirically observed tendency for rising asset prices to rise further. " Big deal.....our bubble based economy based on printing and printing makes this happen without any difficulty. The efficient Market Hypothesis is UNREALISTIC. Meant only to study in class so you understand. It is not meant to be taken seriously in the real world. MARKETS ARE NOT EFFICIENT NOR ARE THEY INFORMATIONAL EFFICIENT. About cognitive bias: well that is just outside my scope of knowledge. Good luck assessing human behavior.
Since the market tends to run in cycles and be fractal in nature, I suspect that whatever strategy works best over X time period, will give outsized returns in the following X time period. The work of JM Hurst and books by Edgar Peters show examples of this (look them up.)
Isn't that the whole point of studying momentum? That it shows the basic formulation of market efficiency is inadequate? Your objections seem to have completely nothing to do with momentum.
That you can use it to make money? confused: <- that's me scratching my head trying to figure out what your problem is)
I am also wondering what your issue with this stuff is. You seem to be anti-EMH but research challenging EMH pisses you off? This is actually a big hurdle for the die-hard efficiency advocates. To make their case they have to either show that this doesn't really exist at any important level, or they have to show it is explained by momentum stocks being temporarily extra-risky in some dimension that nobody has been able to measure yet. BTW, I have read some of the attempts to square this with a risk story and they seem a bit strained.
The short answers - these studies don't usually take taxes into account, there is some disagreement over whether they survive transaction costs, and vanilla momentum returns are very volatile. Sjfan is right, a lot of the implementation stuff is not very public and focuses on things like picking the right categories of stocks to use it on, timing it, and blending it with other factors. But some of it is public if you really care, and I would guess almost every institutional quant equity model has some form of momentum in it. The tranaction cost thing is kind of funny, it seems simple but nobody can agree on how to model them. Do you assume you can cross in a dark pool, or pay bid-ask plus a price impact? Plus when you look at a 40 year backtest do you assume the effect is the same magnitude and you pay today's costs? One trend I have noticed lately is to skip the transaction cost issue and say something like the effect in this paper is relevant for people who were going to trade anyway and can delay their trade or sell something else in their portfolio instead of a stock that is going up.