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Author: Hyperborea Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75776  
Subject: Re: Handling stocks in an IRA Date: 3/1/2002 2:20 AM
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Can you direct me to any books by reputable (educated) authors who can prove that there really is momentum in the stock market?

Two easy to access articles are in William Bernstein's newsletter, Efficient Frontier, in the September 1997 issue - Mean Reversion and You and in the January 2000 issue - Case Studies in Rebalancing. From the second of the two Bernstein writes:

"This is a fairly tedious table, but cursory examination shows that for almost all periods studied there is a monotonous improvement as one increases rebalancing period, except that there seems to be little difference between annual and quarterly rebalancing. (And for those of you who are hard core stat nuts, except for annual/quarterly pairwise t tests between all of the periods are highly significant.) The reason for this is fairly obvious. Asset class returns are not a perfect random walk. If they were, then there would be no profit to rebalancing. After all, rebalancing amounts to a bet that last year's above/below average return will reverse next year. If this is not the case, then there is no sense in rebalancing. There is overwhelming evidence that there is short-term persistence in asset class returns, so it is a good idea not to be too hasty pulling the trigger."

Another source though not so accessible (it's harder to find a copy) is Michael Edleson's book Value Averaging. He discusses the correlation of returns from one period to the next and the use of such a correlation in choosing a rebalancing time frame. This study was done much earlier than Bernstein's and has similar results. For example he shows that in 767 monthly periods of the US stock market we had the following returns:
Last/Current              ABOVE AVG                          BELOW AVG
ABOVE AVG 222 178
BELOW AVG 179 188

So of the total 767 months 222 were above average AND preceded by an above average month etc. Strong evidence of short term momentum. Longer periods show less and less so the momentum disappears over time and we revert to the mean.

Finally, for more academic work you could try: James M. Poterba and Lawrence H. Summers, "Mean Reversion in Stock Prices: Evidence and Implications", Journal of Financial Economics, 22 No. 1 (1988) pg 27-60

Hyperborea
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