One Day Momentum Effect in Stocks
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Strategy in a nutshell
The strategy trades U.S. equities while excluding the least liquid stocks by volume. Each trading day, stocks are sorted into deciles based on the proportion of buyer-initiated trades, identified using quote proximity or tick test rules. Investors take long positions in the top decile and short positions in the bottom decile, holding from market open until close. This systematic, high-frequency approach captures intraday demand pressures arising from trading activity.
Economic rationale
The strategy is grounded in the interaction between noise traders and rational arbitrageurs. Because daily order imbalances display positive autocorrelation, excess buying or selling pressure on one day often persists into the next. Such persistence, driven largely by uninformed traders, creates short-term price patterns that can be systematically exploited. By aligning with these predictable flows, the strategy benefits from the temporary mispricings caused by demand imbalances.