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RFS Advance Access published online on January 20, 2006
Review of Financial Studies, doi:10.1093/rfs/hhj016
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Article

A Trade-Based Analysis of Momentum

Soeren Hvidkjaer 1 *
1 University of Maryland

* To whom correspondence should be addressed.
Soeren Hvidkjaer, E-mail: shvidkja{at}rhsmith.umd.edu


  Abstract

This paper uses transactions data for all NYSE/AMEX stocks in the period 1983-2002 to study how investors trade in Jegadeesh and Titman (1993) momentum portfolios. Among small trades, there is an extremely sluggish reaction to the past returns. For instance, an initial small-trade buying pressure exists for loser stocks, and it gradually converts into an intense selling pressure over the following year. The results are consistent with initial underreaction followed by delayed reaction among small traders. Moreover, small-trade imbalances during the formation period significantly effect momentum returns, suggesting that underreaction among small traders contribute to the momentum effect. Large traders, by contrast, show no evidence of underreaction, and large-trade imbalances have little impact on subsequent returns. Overall, the results suggest that momentum could partly be driven by the behavior of small traders.


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