The profitability of momentum strategies in the S&P 500 Financials between 2020 and 2023

Abstract

This study investigates the profitability of momentum strategies in the S&P 500 Financials sector between 2020 and 2023, a period characterized by unique macroeconomic events such as the COVID-19 pandemic, its recovery, interest rate hikes, and increased market volatility. Using a dataset of 72 financial stocks, a total of 16 momentum strategies were tested across varying formation and holding periods, incorporating overlapping periods to enhance robustness. The momentum strategies (active strategy) were then compared against a benchmark (passive strategy) – S&P 500 Financials – for the same period. The results revealed mixed profitability: while some Winner-Minus-Loser (WML) portfolios delivered positive and statistically significant returns in shorter formation periods, others produced negative or non-significant results, particularly for longer periods. Naturally, the positive returns of some loser portfolios, aligned with the financial sector's structural stability and reduced idiosyncratic risk, undermined the effectiveness of momentum strategies. The findings provide valuable insights for investors by demonstrating the limitations and potential of momentum within the financial sector, particularly in the long and short-term, accounting for sector-specific characteristics like macroeconomic sensitivities and regulatory safeguards. From an academic perspective, it brings more empirical evidence about a heavily studied topic, expanding the knowledge on momentum trading, in a specific sector and period.

Date of Award	24 Mar 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Mário Ferreira (Supervisor)