Are Momentum Profits Robust to Trading Costs?


  • Robert A. Korajczyk,

  • Ronnie Sadka

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    • Korajczyk is from Northwestern University and Sadka is from the University of Washington. We would like to thank Gregory Connor, Kent Daniel, Eric Falkenstein, Alois Geyer, Richard Green (the editor), Ravi Jagannathan, Timothy Johnson, Spencer Martin, Robert McDonald, Karl Schmedders, seminar participants at the American Finance Association 2003 Annual Meetings, London School of Economics, University of New Orleans, University of Pennsylvania, University of Vienna, and an anonymous referee for helpful comments. We also thank Mary Korajczyk for editorial assistance.


We test whether momentum strategies remain profitable after considering market frictions induced by trading. Intraday data are used to estimate alternative measures of proportional and non-proportional (price impact) trading costs. The price impact models imply that abnormal returns to portfolio strategies decline with portfolio size. We calculate break-even fund sizes that lead to zero abnormal returns. In addition to equal- and value-weighted momentum strategies, we derive a liquidity-weighted strategy designed to reduce the cost of trades. Equal-weighted strategies perform the best before trading costs and the worst after trading costs. Liquidity-weighted and hybrid liquidity/value-weighted strategies have the largest break-even fund sizes: $5 billion or more (relative to December 1999 market capitalization) may be invested in these momentum strategies before the apparent profit opportunities vanish.