MOMENTUM PROFITS AND INVESTOR SENTIMENT

Abstract

This paper studies investor sentiment as a predictive factor of momentum profits and evaluates momentum trading profitability for investors. We identify momentum profits on the Norwegian stock market by recreating the momentum strategy presented by Jegadeesh and Titman (1993). Next, we propose a sentiment-based momentum strategy that relies on the ability of investor sentiment to predict future momentum profits. Our findings show that the sentiment-based strategy outperforms the conventional momentum strategy across several different strategy variations. However, we observe the significance of the strategies’ risk-adjusted returns to drastically depend on the estimation of transaction costs. Lastly, we identify a clear pattern in the ability of investor sentiment to predict momentum profits across different time horizons. Keywords. momentum, sentiment, portfolio performance, transaction costs