Enhancing momentum investment strategy using leverage

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Título: Enhancing momentum investment strategy using leverage
Autor/es: Forner, Carlos | Muradoglu, Yaz Gülnur | Sivaprasad, Sheeja
Grupo/s de investigación o GITE: Contabilidad y Finanzas (CyF)
Centro, Departamento o Servicio: Universidad de Alicante. Departamento de Economía Financiera y Contabilidad
Palabras clave: Distress stocks | Investment strategy | Leverage | Momentum | Nonregulated industries
Área/s de conocimiento: Economía Financiera y Contabilidad
Fecha de publicación: ago-2018
Editor: John Wiley & Sons
Cita bibliográfica: Journal of Forecasting. 2018, 37(5): 573-588. doi:10.1002/for.2522
Resumen: Previous studies examine investment strategies based on leverage and momentum; none investigates both variables jointly as an investment strategy. This paper is the first incorporating leverage and momentum together. We show that low past returns (losers) forecast future negative abnormal returns only among stocks with high leverage levels, but not among stocks with low leverage levels. However, high past returns (winners) forecast future positive abnormal returns independently of leverage level. As a result, the negative relation between leverage and future abnormal returns is only observed among loser stocks, and the positive relation between past returns and future abnormal returns is only shown among non‐low leverage stocks. Our results are important in achieving better investment strategies: buying winners' stocks (independently of their level of leverage) and short‐selling losers' stocks with high leverage yield higher abnormal returns than strategies based on only one of these variables. Our two‐dimensional strategy yields risk‐adjusted abnormal returns of 15.66% per annum, whereas the single leverage or momentum strategies yield 7.70% and 7.96% per annum, respectively. The difference is nearly 8% and economically significant. If leverage is considered as proxy for default risk, our results, contrary to previous evidence, show that momentum profits are not exclusive of default stocks, and that momentum returns are not only driven by negative returns yielded by distress stocks.
URI: http://hdl.handle.net/10045/77118
ISSN: 0277-6693 (Print) | 1099-131X (Online)
DOI: 10.1002/for.2522
Idioma: eng
Tipo: info:eu-repo/semantics/article
Derechos: © 2018 John Wiley & Sons, Ltd.
Revisión científica: si
Versión del editor: https://doi.org/10.1002/for.2522
Aparece en las colecciones:INV - Contabilidad y Finanzas - Artículos de Revistas

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