Momentum Anomaly and Baseball Cards

A very interesting paper related to fundamentals of momentum anomaly:

Title: Stock Market Anomalies and Baseball Cards



We show that the market for baseball cards exhibits anomalies that are analogous to those that have been documented in financial markets, namely, momentum, price drift in the direction of past fundamental performance, and IPO under performance. Momentum profits are higher among active players than retired players, and among newer sets than older sets. Regarding IPO under performance, we find that newly issued rookie cards under perform newly issued cards of veteran players, and that newly issued sets under perform older sets. Our evidence is consistent with the predictions of Hong and Stein (1999) and Miller (1977).

Notable quotations from the academic research paper:

"Financial economists have documented the existence of simple strategies that earn unusually high or low returns despite the fact that the strategies do not load heavily on common risk factors. For example, Jegadeesh and Titman (1993) document that during holding periods of 3-12 months, stocks that have performed well in the past 3-12 months continue to outperform stocks that have performed poorly in the past 3-12 months. In addition, Ritter (1991) documents that firms that have recently gone public underperform their peers over their first three years of public trading.

The point of this study is to use a non-financial laboratory in which some, but not all, of theories trying to explain momentum should apply. If we find momentum, this would be evidence that momentum can exist naturally in markets without the bells and whistles of dynamic growth rates, dividends or mutual funds.

Our laboratory is the market for baseball cards. Baseball cards have a long history, dating all the way back to the late 1860’s. By 1991, sales of baseball cards reached $1.2 billion annually. Although baseball cards produce no cash flows, their market values can be substantial. For example, the T206 Honus Wagner, which was produced from 1909-1911, has been sold for as much as $2.8 million. Because there have been long periods of time over which their values have appreciated, baseball cards have often been perceived as investment vehicles.

Most theories of momentum do not apply to this market. There are no growth options, dividends, or mutual funds.

Among the behavioral theories, Hong and Stein (1999) is the one that should most apply to the market for baseball cards. In their model, momentum arises because information gradually diffuses across the investor population. If Hong and Stein theory is valid, then we should find momentum not only in financial markets, but in any market with gradual information diffusion such as the market for baseball cards. Obviously, there are many significant differences between the market for baseball cards and the stock market. One difference is the level of investor sophistication. In the stock market, there are many hedge funds that can arbitrage away inefficiencies and keep prices in line with fundamentals. In the baseball card market, there are dealers who are relatively sophisticated, but much of the activity in this market is driven by children. Moreover, whereas it is common to short stocks, there is little (if any) short selling of baseball cards. Hence, the opportunity for arbitrage is severely limited in the baseball card market. Because of these differences, if gradual information diffusion is truly a source of momentum profits, we should expect momentum to be significantly stronger in the market for baseball cards because the participants are generally less sophisticated and there are fewer opportunities for arbitrage. Consistent with this prediction, we find that short run (3 month) momentum strategies earn 5.6% per month, whereas momentum strategies in the stock market earn less than 1% per month.

Hong and Stein provide additional testable predictions in this market. Active players play up to 162 regular season games per year in addition to the postseason, whereas retired players do not play any games. If gradual information diffusion causes momentum, then momentum should be stronger among the cards of active players than retired players, because there is little to no new information released about the ability (or performance) of retired players. Consistent with this prediction, we find that when the 3 month momentum strategy is restricted to retired players, the strategy earns only 1.63% per month, but when the 3 month momentum strategy is restricted to active players, the strategy earns 9.42% per month.

We test also IPO effect (as in Miller (1977))by analyzing the performance of rookie cards and new sets. A card is a considered a “rookie card” if it is the player’s first appearance on a regular issue card from a major card company. Players often have rookie cards before they play in the major leagues, and some players with rookie cards never make it to the major leagues. Like young firms, there is less information about rookies so it is more difficult to determine their quality/ability. Moreover, when sets are first released, there is a lot of uncertainty over the number of sets produced and how other collectors will value the sets. Hence, according to Miller (1977), we should expect rookie cards and new sets to underperform. Consistent with this prediction, we find that rookie cards and new sets have cumulative abnormal returns of –6.6% and –5.7% (respectively) over the 12 months following their release, both of which are statistically significant (t = 2.8 and 2.8 respectively)."

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