Enhancing momentum profits in the Taiwan Stock Market: The role of extreme absolute strength

We show that stocks with extreme absolute strength are highly volatile and thus attenuate the profitability of momentum in Taiwan, a market that has been widely documented as an exception of the momentum phenomenon. An enhanced momentum strategy that removes these stocks from the winner and loser portfolios generates significant profitability in the intermediate term. A major advantage of the enhanced momentum strategy is its robust profitability over time. More importantly, it is free from the momentum crashes. We provide further evidence to show that return dispersion and information uncertainty are closely related to momentum profitability in the cross-section when stocks with extreme absolute strength are removed.