The main purpose of this proposal is to adopt almost stochastic dominance (ASD) rules to construct zero-cost momentum strategies and examine the profitability of these strategies. The traditional and recent well-studied momentum strategies define winners and losers according to the past return or price. Although these strategies can empirically generate abnormal returns, these criteria do not have economic foundations. All investors might not agree with that the selected winners and losers are the winners and losers in their minds.This paper sheds the light of the literature by adopting the ASD rules, which are the distribution ranking criteria with economic support, to define winners and losers while setting portfolios. ASD is a general approach to expected utility maximization for most economically important decision makers. Thus, based on ASD rules to define dominant stocks as winners and dominated stocks as losers can further improve the performance of momentum strategies.By using the U.K. stock market data, the performance of the proposed strategies will be evaluated according to several well-known pricing models, i.e., the Fama-French three-factor model, the Carhart four-factor model and the liquidity five-factor model. We will also compare the performance of our strategies with the traditional, 52-week high, and other popular types of momentum strategies. The long-run and short-run reversal effects will be examined as well. I will further construct a new momentum factor to price capital assets.
|Effective start/end date||1/08/16 → 31/10/17|
UN Sustainable Development Goals
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