AN ANATOMY OF TRADING STRATEGIES

In this article we use a single unifying framework to analyze the sour ces of profits to a wide spectrum of return-based trading strategies i mplemented in the literature, We show that less than 50% of the 120 st rategies implemented in the article yield statistically significant pr ofits and, unconditionally, momentum and contrarian strategies are equ ally likely to be successful. However, when we condition on the return horizon (short, medium, or long) of the strategy, or the time period during which it is implemented, two patterns emerge. A momentum strate gy is usually profitable at the medium (3- to 12-month) horizon, while a contrarian strategy nets statistically significant profits at long horizons, but only during the 1926-1947 subperiod. More importantly, o ur results show that the cross-sectional variation in the mean returns of individual securities included in these strategies plays an import ant role in their profitability. The cross-sectional variation can pot entially account for the profitability of momentum strategies and it i s also responsible for attenuating the profits from price reversals to long-horizon contrarian strategies.