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Momentum strategies exhibit quarterly seasonality, earning significantly higher average strategy returns in the third month of the quarter than the first month. The authors evaluate the magnitude of quarterly seasonality in various momentum strategies to examine the relation between quarterly seasonality and risk-adjusted monthly returns.

The authors construct long-short portfolios for various types of momentum strategies and calculate the average returns of these portfolios in the three months of the quarter. They also calculate the average changes in institutional ownership across the different portfolios.

The authors demonstrate that quarterly seasonality is directly associated with quarterly changes in net purchases by institutional investors. Additionally, they show that near-term price momentum exhibits more seasonality than other momentum strategies, consistent with institutional investor incentives.

Researchers studying momentum should understand that quarterly seasonality increases the standard deviation of monthly returns for different types of momentum strategies.

Individual investors and investment managers should consider whether it is early or late in the calendar quarter when implementing momentum strategies.

Quarterly seasonality explains several seemingly independent findings in the momentum literature. In cases where researchers show one momentum strategy outperforms another on a risk-adjusted basis, the authors find that the superior strategy exhibits less quarterly seasonality. This pattern holds across types of momentum strategies, strategy formation periods and asset classes.

The purpose of this paper is to critically review the literature on contrarian and momentum trading strategies and identify areas for future research.

Critical review and discussion of the literature.

The extant literature is dynamic and is typified by a number of open questions.

The open questions in the literature relate mainly to the driving forces of investment performance, and the role of risk and asset pricing as well as behavioral human traits. The literature is vast and therefore difficult to classify, cover and discuss.

The paper indicates the possible need for: the development of different asset pricing models and propositions that can have practical implications at a more international context.

The paper provides a critical review of the literature and identifies open issues for future research.

What explains patterns in stock prices is an important question. One such pattern, price momentum, is a well-known capital markets anomaly where recent stock price performance appears to continue into the future. This momentum is frequently thought to reflect delayed reaction by investors to unspecified information (i.e. underreaction). This study aims to provide a useful insight regarding momentum: potential mispricing related to accounting fundamentals appears to conceal longer-term reversals in price momentum. Controlling for these fundamentals reveals that price momentum reverses, indicating that investor overreaction is a potentially important source of stock price momentum. The evidence presented in this study emphasizes the importance of decoupling momentum and accounting fundamentals to achieve a more complete understanding of what explains stock price momentum.

This study explores this question by examining the longer-term performance of momentum stocks in the US market after decoupling it from performance related to accounting fundamentals using returns to fundamentals-based factors as controls in time series regressions.

This study finds evidence of clear reversals in the remaining price momentum. These reversals provide a new insight into the momentum effect because they imply that the component of price momentum not traceable to accounting fundamentals reflects investor overreaction rather than underreaction.

The findings indicate that the underlying nature of the information driving price movements is important to achieving a complete understanding of what explains price momentum. To the best of the author’s knowledge, no other study has examined the behavior of stock price momentum while controlling for accounting fundamentals.