Applying Salience Theory to Momentum Strategies: Euidence from The Norwegian Equity Market 1992-2022

Abstract

This study examines whether conventional momentum strategies can be improved when different percentages of stocks with the highest (lowest) salience theory values are removed from the top (bottom) decile portfolios in the Norwegian equity market spanning 1992-2022. By incorporating this, the strategy yields superior abnormal returns, measured by CAPM-, Fama-French three-factor-, and Carhart four-factor alphas, across all tested holding and formation periods. Performance improvements are primarily observed in the loser portfolio, accompanied by reduced drawdowns, less negative skewness, and decreased kurtosis. Accounting for transaction costs, numerous alphas vanish and longer holding periods surpass in performance, despite initial favouring of 1-month periods. Importantly, we find enhancements are restricted to microcaps and high-volatility environments, challenging the practical applicability of the strategy.