Absolute Strength: Exploring momentum in stock returns (with Huseyin Gulen), 2016
Revision requested by Journal of Financial Economics
We document a new pattern in stock returns that we call absolute strength momentum. Stocks that have significantly increased in value in the recent past (absolute strength winners) continue to gain, and stocks that have significantly decreased in value (absolute strength losers) continue to lose in the near future. Absolute strength winner and loser portfolio breakpoints are recursively determined by the historical distribution of realized cumulative returns across time and across stocks. The historical distribution yields stable breakpoints that are always positive (negative) for the winner (loser) portfolios. As a result, winners are those that have experienced a significant upward trend, losers are those that have experienced a significant downward trend, and stocks with no momentum have cumulative returns that are not significantly different from zero. The absolute strength momentum strategy is related to, but different from, the relative strength strategy of Jegadeesh and Titman (1993). Time-series regressions show that the returns to the absolute strength momentum strategy completely explain the returns to the relative strength strategy, but not vice versa. Absolute strength momentum does not expose investors to severe crashes during crisis periods, and its profits are remarkably consistent over time. For example, an 11-1-1 strategy that buys absolute strength winners and sells absolute strength losers delivers a risk-adjusted return of 2.42% per month from 1965-2014 and 1.55% per month from 2000-2014.
Idiosyncratic volatility of liquidity and expected stock returns (with Ferhat Akbas and Will Armstrong), 2013
We show that idiosyncratic liquidity risk is positively priced in the cross-section of stock returns. Our measure of idiosyncratic liquidity volatility is based on a “market” model for stock liquidity. Idiosyncratic volatility of liquidity is priced in the presence of systematic liquidity risk: the covariance of stock returns with aggregate liquidity, the covariance of stock liquidity with aggregate liquidity, and the covariance of stock liquidity with the market return. Our results are puzzling in light of Acharya and Pedersen (2005) who develop a model in which only systematic liquidity risk affects returns.
The time-varying liquidity risk of value and growth stocks (with Ferhat Akbas, Ekkehart Boehmer, and Egemen Genc), 2012
We study the liquidity exposures of value and growth stocks over business cycles. In worst times, value stocks have higher liquidity betas than in best times, while the opposite holds for growth stocks. Small value stocks have higher liquidity exposures than small growth stocks in worst times. Small growth stocks have higher liquidity exposures than small value stocks in best times. Our results are consistent with a flight-to-quality explanation for the countercyclical nature of the value premium. Exposure to time-varying liquidity risk captures 35% of the small-stock value premium and 100% of the large-stock value premium.