There is substantial evidence that indicates that stocks that perform the best (worst) over a three- to 12-month period tend to continue to perform well (poorly) over the subsequent three to 12 months. Until recently, trading strategies that exploit this phenomenon were consistently profitable in the United States and in most developed markets. Similarly, stocks with high earnings momentum outperform stocks with low earnings momentum. This article reviews the momentum literature and discusses some of the explanations for this phenomenon.
We examine the empirical properties of the payoffs to two popular currency speculation strategies: the carry trade and momentum. We review three possible explanations for the apparent profitability of these strategies. The first is that speculators are being compensated for bearing risk. The second is that these strategies are vulnerable to rare disasters or peso problems. The third is that there is price pressure in currency markets.
This review describes several important recent advances in the measurement of the performance of actively managed portfolios. For returns-based performance evaluation, we discuss several innovations, such as conditional performance evaluation, Bayesian approaches, and a new multiple-testing approach—the false-discovery rate. For portfolio holdings–based performance evaluation, our discussion ranges from extensions of the standard Daniel, Grinblatt, Titman, and Wermers (DGTW) stock return adjustment procedure to conditional holdings-based approaches. Applications of these approaches in the mutual fund, hedge fund, and institutional account universes are presented.
