Industry based investment in stock market is one of the safest way to make good returns. Highlights from some research papers are given below which empirically illustrate the particulars of this investment strategy.
Allaudeen Hameed, Joshua Huang, G. Mujtaba Mian (2009)
The highlights from paper Industries and Stock Return Reversals are:
- We find that a contrarian strategy of buying past losers and selling past winners within industries generates a
significant return of 1.5 percent per month.
- A combined strategy of buying loser stocks in a winning industry and selling winner stocks in a losing industry increases the risk-adjusted return to above 2% per month.
- A simple zero-investment trading strategy that capitalizes on both the intra-industry reversals and across-industry momentum produces a large 2.3 percent return per month.
- We show that stock that do not belong the portfolio constructed based relative industry losers and winners exhibit significant return momentum.
- Intra-industry reversals are significant even for stocks which have large market capitalization, high liquidity and low idiosyncratic volatility.
Moskowitz and Grinblatt (1999)
In a popular research paper Do Industries Explain Momentum?, the authors find that investing in industries with strong momentum gives significantly higher returns than simply buying momentum stocks. The highlights of the paper are:
- Industry momentum investment strategies, which buy stocks from past winning industries and sell stocks from past losing industries, appear highly profitable, even after controlling for size, book-to-market equity, individual stock momentum, the cross-sectional dispersion in mean returns, and potential microstructure influences.
- Trading based on individual stock momentum appears to be a poor strategy when using a short historical horizon for portfolio formation (especially less than one month); it is highly profitable at intermediate horizons (up to 24 months, although it is strongest in the 6- to 12-month range); and is once again a poor strategy at long horizons.
- Once returns are adjusted for industry effects, momentum profits from individual equities are significantly weaker and, for the most part, are statistically insignificant.
- Industry momentum strategies are more profitable than individual stock momentum strategies. Industry momentum strategies are robust to various specifications and methodologies, and they appear to be profitable even among the largest, most liquid stocks.
- Unlike individual stock momentum, industry momentum is strongest in the short-term (at the one-month horizon) and then, like individual stock momentum, tends to dissipate after 12 months, eventually reversing at long horizons. Thus, the signs of the short-term (less than one month) performances of the industry and individual stock momentum strategies are completely opposite, yet the signs of their intermediate and long-term performances are identical.
Marc W. Simpson, Emiliano Giudici, John T. Emery (2011)
Highlights of research on industry based investment strategy from One-Month Individual Stock Return Reversals and Industry Return Momentum are given below:
- A strategy that buys the losers within the previous month’s winning industry and shorts the winners in the previous month’s losing industry outperforms a industry-momentum-based strategy that simply buys the previous month’s winning industry portfolio and shorts the previous month’s losing industry portfolio.
- The previous month’s losers have very high positive returns and the previous month’s winners have low returns
- The momentum effect is very clear in the one-month returns. Those industries that have performed well in the previous month continue to have high positive returns, while those industries that have performed poorly in the previous month continue to have low returns.