Momentum strategies suffer from large drawdowns known as momentum crashes. Partially explained by a pattern of investor speculation focusing on the 52-week high of stocks, these crashes can be mitigated by a revised strategy.
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Abstract
Momentum strategies suffer from occasional large drawdowns referred to as momentum crashes when the market rebounds. We find that a surge of investor speculation toward stocks far from their 52-week highs can partially explain the momentum crashes. If a momentum strategy is revised to be neutral on a 52-week high effect, momentum crashes are significantly attenuated and the revised strategy does not exhibit procyclical returns. Furthermore, the revised strategy generates a higher Sharpe ratio in different sub-periods and international stock markets.