An Anatomy of Trading Strategies

In this article we use a single unifying framework to analyze the sources of profits to a wide spectrum of returnbased trading strategies implemented in the literature. We show that less than 50% of the 120 strategies implemented in the article yield statistically significant profits and, unconditionally, momentum and contrarian strategies are equally 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 strategy is usually profitable at the medium (3to 12-month) horizon, while a contrarian strategy nets statistically significant profits at long horizons, but only during the 19261947 subperiod. More importantly, our results show that the cross-sectional variation in the mean returns of individual securities included in these strategies plays an important role in their profitability. The cross-sectional variation can potentially account for the profitability of momentum strategies and it is also responsible for atten