Refining momentum strategies by conditioning on prior long-term returns: Canadian evidence

Abstract

Cross-sectional returns in Canada are predictable using both momentum and reversal strategies. Synergies realized by focusing on the entire term structure of prior returns lead to better predictability. An enhanced index strategy based on these synergies is profitable most of the time after controlling for transaction costs, although the degree of profitability changes over time. Simulation shows that recent profitability is mainly attributable to the short-side of the momentum strategy. Copyright © 2007 ASAC. Published by John Wiley & Sons, Ltd.