| Abstract |
Nonparametric measures, such as rank and sign of daily returns, capture investor underreaction while mitigating overreaction to extreme movements of stock prices. Alternative momentum strategies formed on the basis of such measures, or nonparametric momentum strategies, outperform both Jegadeesh and Titman's (1993) price momentum and George and Hwang's (2004) 52-week high momentum, and exhibit no long-term return reversals. The profits, however, are not fully explained by common risk-based asset pricing models, and exhibit patterns consistent with the salience theory proposed by Bordallo, Gennaioli, Shleifer (2012). In particular, the nonparametric momentum, in conjunction with the 52-week high momentum, fully explains the price momentum, thus suggesting that the price momentum is driven by investor underreaction rather than continued overreaction. |