Feb 3, 2010
Q & A
A prominent money management firm has recently launched several mutual funds that seek to exploit the positive momentum effect in stock prices. Why does this well-publicized anomaly persist and under what circumstances can investors expect to profit from it?
EFF/KRF: The momentum anomaly has been observed in most major markets (Japan is the exception). Many academics claim that trading costs will wipe out any benefits of trying to trade actively on momentum. This will now be tested by live funds. The results will be interesting.
History provides a cautionary tale. Another anomaly that was all the rage among academics was the January effect. Small stocks tend to have high returns in January and lower return in other months. Interestingly, this anomaly seems to be weak in the live returns of small cap mutual funds, raising the possibility that there is something weird in the quoted prices for small stocks around the turn of the year on major databases.
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ABOUT FAMA AND FRENCH
Eugene F. Fama
The Robert R.
McCormick Distinguished
Service Professor of
Finance at the University
of Chicago Booth School
of Business
Kenneth R. French
The Carl E. and Catherine
M. Heidt Professor of
Finance at the Tuck
School of Business at
Dartmouth College
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Dimensional Fund Advisors Ltd. is authorised and regulated in the United Kingdom by the Financial Services Authority (FRN: 150100), is registered in England and Wales under Company No. 02569601 and VAT No. 577327607. The registered office address of Dimensional Fund Advisors Ltd. is 7 Down Street, London, W1J 7AJ, United Kingdom. Dimensional Fund Advisors Ltd. is a subsidiary of Dimensional Fund Advisors.