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Discussion of An Explanation of Momentum in Canadian Stocks

Discussion of An Explanation of Momentum in Canadian Stocks. Summary. This paper examines the drivers of momentum in Canadian stocks. Momentum is negatively related to book-to-market and analyst coverage. Size appears to play no role in explaining the momentum effect.

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Discussion of An Explanation of Momentum in Canadian Stocks

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  1. Discussion ofAn Explanation of Momentum in Canadian Stocks

  2. Summary • This paper examines the drivers of momentum in Canadian stocks. • Momentum is negatively related to book-to-market and analyst coverage. • Size appears to play no role in explaining the momentum effect. • Analyst coverage is more important than book-to-market in explaining momentum.

  3. Minor Suggestions • The authors mention that research on the causes of momentum profits still in its early stages. In fact, Chan, Jegadeesh, and Lakonishok (1996) has widely discussed them, including price and earning momentum. Hong, Lee, and Swaminathan (2003) earnings momentum yields significant profits in Canada. • Size appears to play no role in explaining the momentum effect. because the authors do not find a smooth monotonic decline in returns across size deciles. Is the conclusion too strong?

  4. The authors should explain more for the formations of control variables (such as size and BM) and portfolios (e.g., formation dates).

  5. Major Suggestions • Elfakhani, Lockwood, and Zaher (1998) document a negative relation between average return and the market capitalization of firms. However, in this paper, Table 7 shows that future stock returns are significant and positively related to firm size. The authors should explain more for this difference.

  6. By Tables 2, 3, and 4, the authors show the momentum profits, after controlling for Size, BM, and analyst coverage, respectively. Since all portfolios are formed under dependent double sorts, it is not rigid to verify the momentum profits after fixing the other control variable.

  7. For example, If the difference in the prior returns between winner and loser under low BM is 100% while that under high BM is 50%, the difference in momentum profit may result from the prior return, instead of BM. Can we conclude that BM is negatively related to momentum? If all portfolios are formed under independent sorts, no such problem exists.

  8. The End

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