Profitability of momentum strategies in Latin America

Abstract

This article examines performance of momentum portfolios in Latin America. Conventional momentum produces zero risk-adjusted returns. Residual and model-based momentum strategies are also unable to deliver positive and significant risk-adjusted performance. A third or absolute strength momentum strategy based on historical returns obtains positive and significant alphas only when controlling for market, size, and value factors. Nonetheless, when we control for country effects or expand the set of risk factors, abnormal returns to absolute strength momentum are also insignificant. In all, after accounting for risk, stock investors in the region were not able to profit from return continuation. © 2020 Elsevier Inc.