Title: Profitability of Momentum Strategies: The Role of Consistent Winners and Losers
Momentum profits, resulting from buying winners and selling losers, are robust and persistent in the stock market; however, less than 60% of winner and loser stocks remain in winner and loser groups in the subsequent formation month. This study applies duration analysis to test the consistency of momentum effect and demonstrates that consistent winners and losers experience higher subsequent momentum profits than inconsistent winners and losers. Consistent with the information asymmetry hypothesis and the heterogeneous beliefs hypothesis, the momentum consistency is associated to size, idiosyncratic risk, institutional ownership, and trading volume. In addition, an asymmetric effect is observed that the post-formation return contributes to the winner consistency more, while the formation period return can explain the loser consistency more. The duration analysis also shows that the trading volume reflects effects of both heterogeneous beliefs among investors and the momentum lifecycle. The consistent momentum strategy may offer an enhanced performance despite controlling for factors associated to market risk, size, book-to-market ratio, momentum effect, and liquidity risk.