Negative Momentum Profit in Korea and its Sources

To analyze the negative momentum profit in Korea, we further divide the decomposition of Lo and MacKinlay (1990) into winners' and losers' auto‐ and cross‐serial covariances. We find that the negative autocovariance and the positive cross‐serial covariance in Lo and MacKinlay's decomposition are asymmetric between winners and losers. The negative autocovariance is mainly from losers and the positive cross‐serial covariance mainly between past winners and current losers. By investigating time‐series characteristics of auto‐(cross‐serial) covariances, we cannot observe any systematic change of auto‐(cross‐serial) covariances in the momentum period. Based upon the evidence in this paper, we argue that positive cross‐serial covariance between past winners and current losers seems to be an important driving force behind the negative momentum profit in Korea. Therefore, investors' underreaction to market‐wide information would be plausible explanation of the negative momentum profit.