Eugene Fama on Momentum Stock

From The Region:

Region: Let me ask you about momentum. You’ve said that it’s the strongest challenge to the hypothesis of market efficiency. Can you elaborate on that?
Fama: There’s evidence that if you rank stocks every month based on their last year of returns, the very extreme winners tend to win for a few more months and the losers tend to lose for a few more months.
That seems to be true in U.S. data beginning around 1950. We don’t have foreign data going back that far, but it tends to be there in major foreign markets except for Japan. It doesn’t tend to be there in the U.S. data for the ’30s and ’40s. So there’s some chance that it is just a chance result. There are so many people looking for anomalies in the data, that may just be the biggest one that they’ve found. Maybe it won’t be there in the future. We don’t know yet.
Region: Is there an opportunity to make money there?
Fama: Well, there isn’t much of an opportunity to make money, because as I said, you do this every month. And if you rank and trade stocks every month, the turnover of these portfolios is enormous.
Region: The costs will eat up the profits.
Fama: Right. The costs will kill you. So the people who have written these papers have said, basically, “This is interesting, but forget about trading on it.” But it’s still interesting.

Posted by on December 16th, 2007 at 9:41 pm


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