Two Centuries of Price-Return Momentum
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What they found
To check whether momentum was a twentieth-century accident, the authors assembled U.S. stock price data back to 1801 and tested the standard momentum strategy in the 125 years before the samples used in earlier research. Momentum was significantly profitable in the out-of-sample 1801 to 1926 period, with a similar pattern of large drawdowns during market reversals. They also found that momentum's dynamic market beta (long high-beta stocks after bull markets, long low-beta after bear markets) explains much of its crash risk.
What you can use
- Momentum passed the longest out-of-sample test available: it existed before anyone was looking for it.
- Momentum crashes are not a recent phenomenon; they recur every few decades in reversal markets.
- Momentum portfolios drift toward high beta after rallies; know what your beta is before a turn.
Caveats
Nineteenth-century data is thin, dominated by banks and railroads, and subject to survivorship and pricing issues the authors try to correct. Gross of costs in illiquid early markets.
Tags: momentum, long-history, out-of-sample, equities
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.