Momentum Factor Effect in Stocks

Fundamental reason

Simple trading strategy

Out-of-sample strategy's implementation/validation in QuantConnect's framework(chart, statistics & code)

Source paper

Asness, Frazzini, Israel, Moskowitz: Fact, Fiction and Momentum Investing

Abstract: It’s been over 20 years since the academic discovery of momentum investing (Jegadeesh and Titman (1993), Asness (1994)), yet much confusion and debate remains regarding its efficacy and its use as a practical investment tool. In some cases “confusion and debate” is us attempting to be polite, as it is near impossible for informed practitioners and academics to still believe some of the myths uttered about momentum — but that impossibility is often belied by real world statements. In this article, we aim to clear up much of the confusion by documenting what we know about momentum and disproving many of the often-repeated myths. We highlight ten myths about momentum and refute them, using results from widely circulated academic papers and analysis from the simplest and best publicly available data.

Other papers

• Jagadeesh, Titman: Momentum

  Abstract: There is substantial evidence that indicates that stocks that perform the best (worst) over a three- to 12-month period tend to continue to perform well (poorly) over the subsequent three to 12 months. Momentum trading strategies that exploit this phenomenon have been consistently profitable in the United States and in most developed markets. Similarly, stocks with high earnings momentum outperform stocks with low earnings momentum. This article reviews the evidence of price and earnings momentum and the potential explanations for the momentum effect.

• Vogel, Gray: The Quantitative Momentum Investing Philosophy - Buy Stocks with the Highest Quality Momentum

  Abstract: Abstract: Our Quantitative Momentum (QM) system seeks to identify stocks with the highest quality “momentum.” We consider the term momentum to mean a continuation of past returns—past winners tend to be future winners, while past losers tend to be future losers. How can we exploit this phenomenon? At Alpha Architect, we have designed a system to identify the “quality” of momentum by examining how the momentum is formed.

• Korajczyk, Sadka: Are Momentum Profits Robust to Trading Costs?

  Abstract: This paper tests whether momentum-based strategies remain profitable after considering market frictions. Alternative measures of price impact are estimated and applied to alternative momentum-based trading rules. The performance of traditional momentum strategies, in addition to strategies designed to reduce the cost of trades, is evaluated. We find that, after taking into account the price impact induced by trades, as much as 5 billion dollars may be invested in some momentum-based strategies before the apparent profit opportunities vanish. Other, extensively studied, momentum strategies are not implementable on a large scale.

• Jagadeesh, Titman: Momentum (2011 version)

  Abstract: There is substantial evidence that indicates that stocks that perform the best (worst) over a three to 12 month period tend to continue to perform well (poorly) over the subsequent three to 12 months. Up until recently, trading strategies that exploit this phenomenon were consistently profitable in the United States and in most developed markets. Similarly, stocks with high earnings momentum outperform stocks with low earnings momentum. This article reviews the momentum literature and discusses some of the explanations for this phenomenon.

• Israel, Moskowitz: How Tax Efficient are Equity Styles?

  Abstract: We examine the tax efficiency and after-tax performance of long only equity styles. On an after-tax basis, value and momentum portfolios outperform, and growth underperforms, the market. We find that momentum, despite its higher turnover, is often more tax efficient than value, because it generates substantial short-term losses and lower dividend income. Tax optimization improves the returns to all equity styles, with the biggest improvements accruing to value and momentum styles. However, only momentum allows significant tax minimization without incurring significant style drift. This is because managing gain and loss realization incurs less tracking error than avoiding dividend income and momentum's tax exposure is primarily capital gains, while value and growth's tax exposures are more sensitive to dividends.

• Lewis: Relative Strength and Portfolio Management

  Abstract: This paper presents the results of several relative strength strategies tested in a real world portfolio management setting. Monte Carlo simulations are used to determine the possible range of outcomes if a portfolio manager selects a subset of high relative strength securities over time. A testing protocol that rebalances the portfolio on a continuous basis is also used to simulate real world portfolio management practices.

• Barroso, Santa-Clara: Managing the Risk of Momentum

  Abstract: Compared to the market, value or size risk factors, momentum has offered investors the highest Sharpe ratio. However, momentum has also had the worst crashes, making the strategy unappealing to investors with reasonable risk aversion. We find that the risk of momentum is highly variable over time and quite predictable. The major source of predictability does not come from systematic risk but from specific risk. Managing this time-varying risk virtually eliminates crashes and nearly doubles the Sharpe ratio of the momentum strategy. Risk-managed momentum is a much greater puzzle than the original version.

• Rachwalski, Wen: Momentum, Risk and Underreaction

  Abstract: Momentum profits can be explained by exposure to risks omitted from common factor models and underreaction to innovations in these omitted risks. Consistent with risk as a partial explanation of momentum profits, long formation period momentum strategies earn higher returns and are more highly correlated with factors designed to measure risk than short formation period momentum strategies.

• Landis, Skouras: Momentum is Higher Than We Think

  Abstract: This paper evaluates Momentum on international markets based on data from Thompson Datastream. Using a complete ltered and corrected daily database from 52 International markets, and more than 50.000 common stocks, from TDS, we re-examine previous empirical work on International Momentum and document consistently higher momentum returns for the majority of markets and regions of our sample. We find evidence that data outliers create a "Pseudo-Reversal effect" in international Winner minus Loser profits, reflecting in the overestimation of premiums of loser portfolios and the underestimation of the prots of the momentum strategies. Moreover, we revise International Momentum premiums from 1964 to 2010, for all markets and regions of our sample and document that momentum continues to be strong in the majority of individual markets and all in regions except Japan.

• Li, Brooks, Miffre: Low-Cost Momentum Strategies

  Abstract: The article analyses the impact of trading costs on the profitability of momentum strategies in the UK and concludes that losers are more expensive to trade than winners. The observed asymmetry in the costs of trading winners and losers crucially relates to the high cost of selling loser stocks with small size and low trading volume. Since transaction costs severely impact net momentum profits, the paper defines a new low-cost relative-strength strategy by shortlisting from all winner and loser stocks those with the lowest total transaction costs. While the study severely questions the profitability of standard momentum strategies, it concludes that there is still room for momentum-based return enhancement.

• Henker, Martens, Huynh: The Vanishing Abnormal Returns of Momentum Strategies and 'Front-Running' Momentum Strategies

  Abstract: We find large variations in returns from momentum strategies. Momentum strategies did not earn significant returns during the period of 1993-2004 which was due to their poor performance over the period from 2001-2004. We find that the previously documented large firm momentum effect is sensitive to the momentum strategy examined, and is in our sample driven by the abnormal returns of large Nasdaq stocks. We also evaluate momentum strategies that do not adhere to the end of month portfolio formation universally used in the academic literature. To this end we form portfolios one week prior to the end of month and call them 'front-running' momentum portfolios. Consistent with institutional momentum trading affecting end of month returns and volatility, we find that 'front-running' a momentum strategy generates similar, but less volatile returns than the month-end strategy.

• Israel, Moskowitz: The Role of Shorting, Firm Size, and Time on Market Anomalies

  Abstract: We examine the role of shorting, firm size, and time on the profitability of size, value, and momentum strategies. We find that long positions comprise almost all of size, 60% of value, and half of momentum profits. Shorting becomes less important for momentum and more important for value as firm size decreases. The value premium decreases with firm size and is weak among the largest stocks. Momentum profits, however, exhibit no reliable relation with size. These effects are robust over 86 years of U.S. equity data and almost 40 years of data across four international equity markets and five asset classes. Variation over time and across markets of these effects is consistent with random chance. We find little evidence that size, value, and momentum returns are significantly affected by changes in trading costs or institutional and hedge fund ownership over time.

• Cheema: Three Essays on Momentum Returns

  Abstract: This dissertation consists of three essays on momentum returns. The first essay is entitled ‘Momentum Returns, Market States and the Global Financial Crisis’. This essay investigates the profitability of the momentum trading strategy in the stock exchanges of Shanghai, Shenzhen and Hong Kong over the period 1994 to 2010. In the second essay, entitled ‘Momentum Returns and Information Uncertainty’, I study the impact of information uncertainty on the profitability of the momentum trading strategy. In the third and final essay, entitled ‘Momentum Returns, Long-Term Reversal and Idiosyncratic Volatility’, I study the impact of idiosyncratic volatility (IV) on the profitability of momentum and long-term reversal trading strategies in China over the period 1994 to 2010.

• Cakici, Tan: Size, Value, and Momentum in Developed Country Equity Returns: Macroeconomic and Liquidity Exposures

  Abstract: The paper investigates value and momentum factors in 23 developed international stock markets. We find that typically value and momentum premia are smaller and more negatively correlated for large market capitalization stocks relative to small. Momentum factors are more highly correlated internationally relative to value. We provide international evidence on three sets of risk exposures of value and momentum returns: macroeconomic risk, funding liquidity risk, and stock market liquidity risk. We find that value returns are typically lower prior to a recession while momentum returns often exhibit little sensitivity. Value returns are typically lower in times of poor funding liquidity, whereas, with notable exceptions, momentum returns are typically unaffected. Lastly, for almost all countries, value returns are high in poor stock market liquidity conditions.

• Jensen-Gaard: Equity Investment Styles - Recent evidence on the existence and cyclicality of investment styles

  Abstract: Over the past two decades, financial academics and investment professionals have documented several anomalies on the global financial markets. A subset of these anomalies, known as equity style strategies, has been shown to yield substantial excess returns, which cannot be explained by traditional finance theory. However, in the light of the financial turmoil during the 2000s, several studies have shown considerable changes in the magnitude of the style-based strategy premiums. The purpose of this thesis is to investigate whether recent data support the continued existence of these premiums and evaluate how these premiums fluctuate in relation to the economic cycle.

• Foltice, Langer: Profitable Momentum Trading Strategies for Individual Investors

  Abstract: For nearly three decades, scientific studies have explored momentum investing strategies and observed stable excess returns in various financial markets. However, the trading strategies typically analyzed in such research are not accessible to individual investors due to short selling constraints, nor are they profitable due to high trading costs. Incorporating these constraints, we suggest and explore a simplified momentum trading strategy that only exploits excess returns from topside momentum for a small number of individual stocks. Building on US data from the NYSE from 1991-2010, we analyze whether such a simplified momentum strategy outperforms the benchmark after factoring in realistic transaction costs and risks.

• Sarwar: Sources of Momentum Returns: A Decomposition of the Explained and the Unexplained Risk Factors

  Abstract: In this paper, I examine the sources of momentum returns and uncover a list of intriguing features. I find that when the momentum returns are decomposed the contributions of the explained and the unexplained risk factors depend on the level of analysis, the risk factors used, and the lag structure of the risk factors. Further, I find that at the individual stock level, the total contribution of the lagged macroeconomic risk factors is 59 percent per month but that the total contribution of the contemporaneous macroeconomic risk factors at the portfolio level is only 9 percent per month. These new findings add important insights to the existing momentum theories.

• Garcia-Feijoo, Jensen, Jensen: Momentum and Funding Conditions

  Abstract: We find strong evidence linking the momentum pattern in equity returns with a prominent measure of macroeconomic conditions, specifically the funding environment. We show that the size and consistency of the momentum premium varies systematically across funding states. Furthermore, we find evidence that the relationship between momentum returns and firm characteristics (documented in previous research) is conditional on the funding environment. After controlling for the funding state, we find that the importance of market states and return dispersion disappears. Additionally, funding conditions appear to contain incremental information about the momentum premium even after adjusting for the influence of market states and return dispersion. Overall our results are consistent with the conjecture that transitions in the funding environment encourage investors to revise their portfolio allocations; this reallocation produces inter-temporal variation in the momentum return pattern.

• Geczy, Samonov: 215 Years of Global Multi-Asset Momentum: 1800-2014 (Equities, Sectors, Currencies, Bonds, Commodities and Stocks)

  Abstract: Extending price return momentum tests to the longest available histories of global financial asset returns, including country-specific sectors and stocks, fixed income, currencies, and commodities, as well as U.S. stocks, we create a 215-year history of multi-asset momentum, and we confirm the significance of the momentum premium inside and across asset classes. Consistent with stock-level results, we document a large variation of momentum portfolio betas, conditional on the direction and duration of the return of the asset class in which the momentum portfolio is built. A significant recent rise in pair-wise momentum portfolio correlations suggests features of the data important for empiricists, theoreticians and practitioners alike.

• Goyal, Jegadeesh: Cross-Sectional and Time-Series Tests of Return Predictability: What Is the Difference?

  Abstract: We analyze the differences between past-return based strategies that differ in conditioning on past returns in excess of zero (time-series strategy, TS) and past returns in excess of the cross-sectional average (cross-sectional strategy, CS). We find that the return difference between these two strategies is mainly due to time-varying long positions that the TS strategy takes in the aggregate market and, consequently, do not have any implications for the behavior of individual asset prices. However, TS and CS strategies based on financial ratios as predictors are sometimes different due to asset selection.

• Fan, Opsal, Yu: Equity Anomalies and Idiosyncratic Risk Around the World

  Abstract: In this study, we examine how idiosyncratic risk is correlated with a wide array of anomalies, including asset growth, book-to-market, investment-to-assets, momentum, net stock issues, size, and total accruals, in international equity markets. We use zero-cost trading strategy and multifactor models to show that these anomalies produce significant abnormal returns. The abnormal returns vary dramatically among different countries and between developed and emerging countries. We provide strong evidence to support the limits of arbitrage theory across countries by documenting a positive correlation between idiosyncratic risk and abnormal return. It suggests that the existence of these well-known anomalies is due to idiosyncratic risk. In addition, we find that idiosyncratic risk has less impact on abnormal return in developed countries than emerging countries. Our results support the mispricing explanation of the existence of various anomalies across global markets.

• Berghorn, Otto: Mandelbrot Market-Model and Momentum

  Abstract: Mandelbrot has significantly contributed in many ways to the area of finance. He was one of the first who criticized the oversimplifications centered around the early stochastic process models of Bachelier utilizing normal distribution. In his view, markets were fractal and much wilder than classical theory suggests. Particularly, his work of fractional Brownian motion showed that the independence claim made by that hypothesis is not valid; in addition, he proposed a multi-fractal asset model to reconcile for effects observed in the market. However, it is also known that his vision of fractal markets used fractal trends. In this work, we will revisit Mandelbrot’s vision of fractal markets. We will show that the momentum effect discussed heavily in literature can be modeled by the so-called Mandelbrot Market-Model. Additionally, this model shows, from the risk side, that markets are wilder because of trend structures compared with classical models.

• Moskowitz: Asset Pricing and Sports Betting

  Abstract: I use sports betting markets as a laboratory to test behavioral theories of cross-sectional asset pricing anomalies. Two unique features of these markets provide a distinguishing test of behavioral theories: 1) the bets are completely idiosyncratic and therefore not confounded by rational theories; 2) the contracts have a known and short termination date where uncertainty is resolved that allows any mispricing to be detected. Analyzing more than a hundred thousand contracts spanning two decades across four major professional sports (NBA, NFL, MLB, and NHL), I find momentum and value effects that move betting prices from the open to the close of betting, that are then completely reversed by the game outcome. These findings are consistent with delayed overreaction theories of asset pricing. In addition, a novel implication of overreaction uncovered in sports betting markets is shown to also predict momentum and value returns in financial markets.

• Schmidt, Von Arx, Schrimpf, Wagner, Ziegler: Size and Momentum Profitability in International Stock Markets

  Abstract: We study the link between the profitability of momentum strategies and firm size, drawing on an extensive dataset covering 23 stock markets across the globe. We first present evidence of an “extreme” size premium in a large number of countries. These size premia, however, are most likely not realizable due to low stock market depth. We also show that international momentum profitability declines sharply with market capitalization. Momentum premiums are also considerably diminished by trading costs, when taking into account the actual portfolio turnover incurred when implementing this strategy. In contrast to strategies based on size, we find that momentum premia especially for medium-sized stocks still remain economically and statistically significant in most equity markets worldwide after adjusting for transaction costs.

• van Oord: Optimization of Equity Momentum: (How) Does it Work?

  Abstract: Standard mean-variance optimized momentum outperforms the traditional equally weighted momentum strategy if the expected return vector used reflects momentum's top and bottom only characteristic. This top and bottom only characteristic is the phenomenon that only the stocks in the top decile of momentum's ranking outperform and that only stocks in the bottom decile underperform, while all stocks in the intermediate deciles of the ranking have similar performance. If the optimization does not take this phenomenon into account the portfolio is also long the deciles 2 to 5 and short the deciles 6 to 9, while all these positions thus do not add anything to the return of the strategy. A new simplified bootstrapping methodology shows that the Sharpe-ratio of 52.8 percent of the optimized portfolio is significantly higher than the Sharpe-ratio of 29.3 percent for traditional equally weighted momentum.

• Goetzmann, Huang: Momentum in Imperial Russia

  Abstract: Some of the leading theories of momentum have different empirical predictions about its profitability conditional on market composition and structure. The institutional theory of Vayanos and Woolley predicts lower momentum profits in markets with less agency. In this paper we use a dataset from a major 19th century equity market to test these predictions. Over this period there was no evidence of delegated management in Imperial Russia. A regulatory change in 1893 made speculating on the St. Petersburg stock market more accessible to small investors. We find a momentum effect that is similar in magnitude to those in modern markets, and stronger during the post-1893 period than during the pre-1893 period, consistent with the overconfidence theory of momentum.

• Heidari: Over or Under? Momentum, Idiosyncratic Volatility and Overreaction

  Abstract: Several studies have attributed the high excess returns of the momentum strategy in the equity market to investor behavioral biases. However, whether momentum effects occur because of investor underreaction or because of investor overreaction remains a question. Using a simple model to illustrate the linkage between idiosyncratic volatility and investor overreaction as well as the stock turnover as another measure of overreaction, I present evidence that supports the investor overreaction explanation as the source of momentum effects. Furthermore, I show that when investor overreaction is low, momentum effects are more due to industries (industry momentum) rather than stocks.

• Dobrynskaya: Upside and Downside Risks in Momentum Returns

  Abstract: I show that the past winners and the past losers are differently exposed to the upside and downside market risks. Winners systematically have higher relative downside market betas and lower relative upside market betas than losers. As a result, the winner-minus-loser momentum portfolios are exposed to extra downside market risk, but hedge against the upside market risk. Such asymmetry in the upside and downside risks is a mechanical consequence of rebalancing momentum portfolios. But it is unattractive for an investor because both positive relative downside betas and negative relative upside betas carry positive risk premiums according to the Downside-Risk CAPM. Hence, the high returns to momentum strategies are a mere compensation for their upside and downside risks.

• Cakici, Tang, Yan: Do the Size, Value, and Momentum Factors Drive Stock Returns in Emerging Markets?

  Abstract: This paper investigates the size, value and momentum effects in 18 emerging stock markets during the period 1990−2013. We find that size and momentum strategies generally fail to generate superior returns in emerging markets. The value effect exists in all markets except Brazil, and it is robust to different periods and market conditions. Value premiums tend to move positively together across different markets, and such inter-market co-movements increase overtime and during the global financial crisis.

• Schmidt: Trading Strategies Based on Past Returns - Evidence from Germany

  Abstract: Over the total time period from 1965 to 2014, the classical momentum strategy based on performance over the past two to twelve months earned an average return of 1.57% per month (excluding microcap stocks and value-weight returns). In the most recent ten-year time period, it has been even larger: 2.27%, which is much larger than in the U.S. However, the profitability net of transaction costs appears weak because the strategy involves trading in disproportionately small stocks with high transaction costs, especially observed for the loser portfolio. A strategy that only concentrates on the winner portfolio and thus avoids potential problems associated with (short) selling the costly loser portfolio appears to earn strong and persistently abnormal profits, even after transaction costs.

• Bhattacharya, Li, Sonaer: Has Momentum Lost Its Momentum?

  Abstract: We evaluate the robustness of momentum returns in the US stock market over the period 1965 to 2012. We find that momentum profits have become insignificant since the late 1990s partially driven by pronounced increase in the volatility of momentum profits in the last 14 years. Investigations of momentum profits in high and low volatility months address the concerns about unprecedented levels of market volatility in this period rendering momentum strategy unprofitable. Past returns, can no longer explain the cross-sectional variation in stock returns, even following up markets. Investigation of post holding period returns of momentum portfolios and risk adjusted buy and hold returns of stocks in momentum suggests that investors possibly recognize that momentum strategy is profitable and trade in ways that arbitrage away such profits.

• Dolvin, Foltice: Where Has the Trend Gone? An Update on Momentum Returns in the U.S. Stock Market

  Abstract: More recent studies note a declining benefit relative to that identified in seminal studies on momentum. Our results for the earlier part of our sample period (i.e., 1986 to 2006) fall in line with previous studies, as we find a monotonic relationship between decile portfolios formed based on prior six month performance and their subsequent twelve month holding period excess returns. In contrast, when we evaluate more recent periods (i.e., 2007-2015 and 2010-2015), we find dramatically different results. In particular, alphas for the “winner” portfolio are negative during both sub-periods and distribution follows a more inverted U-shaped curve.

• de Carvalho, Xiao, Soupe, Dugnolle: Diversify and Purify Factor Premiums in Equity Markets

  Abstract: In this paper we consider the question of how to improve the efficacy of strategies designed to capture factor premiums in equity markets and, in particular, from the value, quality, low risk and momentum factors. We consider a number of portfolio construction approaches designed to capture factor premiums with the appropriate levels of risk controls aiming at increasing information ratios. We show that information ratios can be increased by targeting constant volatility over time, hedging market beta and hedging exposures to the size factor, i.e. neutralizing biases in the market capitalization of stocks used in factor strategies.

• Cheema, Nartea, Man: Cross-Sectional and Time-Series Momentum Returns and Market States

  Abstract: Recent evidence on momentum returns shows that the time-series (TS) strategy outperforms the cross-sectional (CS) strategy. We present new evidence that this happens only when the market continues in the same state, UP or DOWN. In fact, we find that the TS strategy underperforms the CS strategy when the market transitions to a different state. Our results show that the difference in momentum returns between TS and CS strategies is related to both the net long and net short positions of the TS strategy.

• Ross, Moskowitz, Israel, Serban: Implementing Momentum: What Have We Learned?

  Abstract: An abundance of academic evidence and theory exists on the efficacy and intuition behind momentum investing, yet a limited number of studies discuss the feasibility of running momentum portfolios in practice. And no study to date has directly analyzed implementation costs for a live momentum portfolio.

• Souza: A Critique of Momentum Anomalies

  Abstract: This paper argues that momentum regularities in asset prices are not anomalies. They appear because assets have persistent risk exposures. A general, frictionless, risk-based asset pricing framework with rational expectations and a stationary but stochastic price of risk process theoretically explains why momentum returns (i) are positive, (ii) negatively skewed, (iii) have negative CAPM betas, (iv) positive CAPM alphas, and (v) "crash" infrequently and predictably in market rebounds. The paper offers further empirical evidence, based on different price of risk proxies, supporting the framework presented and illustrates the explanation with Monte Carlo simulations.

• Muller, Muller: The Remarkable Relevance of Characteristics for Momentum Profits

  Abstract: This paper provides a comprehensive analysis of a large set of momentum enhancing strategies for global equity markets. Our findings reveal the relevance of characteristics in enhancing and explaining momentum after accounting for possible interrelations with idiosyncratic volatility and extreme past returns. Out of a set of eighteen stock characteristics, we find particularly age, book-to-market, maximum daily return, R², information diffusion, and 52-week high price to matter for momentum profits. Overall, and consistent with behavioral explanation attempts, momentum appears to work best for hard-to-value firms with high information uncertainty.

• Abhyankar, Filippou, Garcia-Ares, Haykir: Overcoming Arbitrage Limits: Option Trading and Momentum Returns

  Abstract: Returns to cross-sectional momentum in the U.S. equity market, over 1996-2016, are fifty percent lower and statistically insignificant relative to the previous two decades. The decline is linked to larger arbitrage capital flows, lower stock trading costs, and greater investor awareness after publication. During this period stocks with traded options rose to more than seventy percent of all listed stocks. We find strong evidence that the reduction in momentum profits is also related to stock option trading that offers alternate avenues for short sales and information flows that contribute to more efficient stock pricing.

• Avramov, Hore: Cross-Sectional Factor Dynamics and Momentum Returns

  Abstract: This paper proposes and implements an inter-temporal model wherein aggregate consumption and asset-specific dividend growths jointly move with two mean-reverting state variables. Consumption beta varies through time and cross sectionally due to variation in half-lives and stationary volatilities of the dividend signals.

• Teluja: Unraveling Momentum's Moments

  Abstract: I examine the momentum anomaly through the prism of higher order risk neutral moments of high and low momentum stocks. I use option prices from 2002 to 2013 to extract time varying ex ante estimates of variance, skewness and kurtosis of high and low momentum stocks. High momentum stocks have lower variance, less negative skewness and lower kurtosis. This is in contrast to studies that use static, ex post estimates of skewness to explain momentum returns as a function of exposure to the higher order moments of the underlying return distribution. These results highlight that momentum returns can not be explained by ex ante estimates of higher order moments and remain dicult to resolve empirically in a rational expectations framework.

• Dong: Risk or Mispricing? Cross-Country Evidence on the Cross-Section of Stock Returns

  Abstract: Using a novel collection of market characteristics from 40 countries, this paper test competing explanations behind five major anomalies classified in Hou, Xue, and Zhang (2015): momentum, value-growth, investment, profitability, and trading frictions. Results show that anomaly returns highly correlate with proxies for market efficiency, investor protection, limits-to-arbitrage, and investor irrationality. New to existing studies, results favor a limits-to-arbitrage explanation for momentum effect, and a mispricing explanation for value-growth and investment effects. Results also suggest that profitability effect may be a result of both rational risk pricing and market inefficiency while remain silent on the cause of trading frictions effect. These findings have new implications on return predictability in both U.S. and international markets.

• Malitskaia: Uncovering Momentum

  Abstract: The explanation of the momentum premium represents an ongoing challenge, triggering the development of multiple risk-based and behavioral models. The paper explores the momentum strategy following a systematic divide-and-conquer approach composed from a sequence of top-bottom steps: dissecting the momentum performance along bull/bear states and winners/losers deciles; identifying the unscaled momentum decile as a basic common block across conventional, time-series and dual momentum strategies; rolling the combined in- and out-of-sample analysis, and clustering momentum decile time series. The corresponding findings support the Efficient Market Hypothesis and compliment existing models with techniques for identifying and assessing temporal patterns.

• Correira, Barbosa: Can Post-Earnings Announcement Drift and Momentum Explain Reversal?

  Abstract: We study the interrelation among the post-earnings announcement drift (PEAD) and momentum short-term anomalies, and the reversal long-term anomaly. Some theories argue that PEAD and momentum are a consequence of underreaction to new information on the market. One theory in particular, suggests that this underreaction occurs because investors are unsure about their interpretations of the impact of new information on the fundamental price, and look for the market consensus interpretation for guidance. This learning process takes time, and until it is complete, prices do not fully incorporate the new information. Furthermore, the more difficult it is to interpret the new information, the more prices underreact to the new information arrival, and the longer it takes for them to fully incorporate this information. On the other hand, there are investors that rely too much on past performance (known as “trend chasers”). These investors, motivated by the short-term performance during the underreaction period, push prices beyond their fundamentals, resulting in an overreaction whose correction generates long-run reversal. And the more difficult it is to interpret new information, the more likely it is that trend chasers create overreaction, leading to stronger reversals in the future. Therefore, uncertainty about the interpretation of new information can potentially link today’s reversal to past momentum and PEAD. Our major goal is to test this hypothesis. For that, we use a multifactor risk-based model and NYSE-AMEX stock prices for the period starting at January 1975 to December 2010. Our main conclusion points for a statistical and economical relation between past PEAD and reversal. The higher the returns of the PEAD zero-investment portfolio two years ago, the higher the returns of the reversal zero-investment portfolio today.

• Raju, Chandrasekaran: Implementing a Systematic Long-only Momentum Strategy: Evidence From India

  Abstract: We show that a monthly-rebalanced, long-only portfolio of top-decile stocks selected from the NIFTY100 using `off-the-shelf' momentum criteria significantly outperforms the NIFTY100 Index - both in terms of absolute returns (by 10.70% pa) and risk adjusted returns, with a mean turnover of 32.10% per month. We show that momentum persists in the near term but dissipates over time. We demonstrate that our long-only approach has a significant tilt to the momentum factor. We also show that time in the market rather than timing the market is important for momentum investing. The strategy has higher volatility and the occasional momentum crash. The strategy's out performance survives real-world implementation given the rise of discount brokers in India. In the absence of cheap ETFs to get exposure to momentum, the systematic long-only strategy from the most liquid part of the market using `off-the-shelf' criteria provides a practical, executable investment methodology that exposes an investor to momentum in the Indian market.

• Blitz, Baltussen, van Vliet: When Equity Factors Drop Their Shorts

  Abstract: This paper makes a breakdown of common Fama-French style equity factor portfolios into their long and short legs. We find that factor premiums originate in both legs, but that (i) most added value tends to come from the long legs, (ii) the long legs of factors offer more diversification than the short legs, and (iii) the performance of the shorts is generally subsumed by the longs. These results hold across large and small caps, are robust over time, carry over to international equity markets, and cannot be attributed to differences in tail risk. Portfolio tests suggest that the short legs are of limited value to most investors, while the long legs in small caps are most attractive. We also examine recent claims that the value and low-risk factors are subsumed by the new Fama-French factors, and find that this does not hold for the long legs of these factors. Altogether, our findings show that decomposing canonical factors into their long and short legs is crucial for understanding factor premiums and building efficient factor portfolios.

• Parajuli, Bharat Raj: Does the Delay in Firm-Specific Information Cause Momentum?

  Abstract: In this paper, I develop a medium-horizon firm-specific information delay (FSID) measure using the methodology introduced by Hou and Moskowitz (2005) (hereafter HM). Unlike the HM measure of the speed of diffusion of US market-specific information in the short horizon (four weeks), FSID measures the speed of diffusion of firm-specific information in the medium horizon (six months). Whereas previous studies including HM found no significant relation between momentum premium and the HM measure, I find that momentum ceases to exist in the cross section of firms after controlling for FSID. FSID has a symmetrical effect on both loser and winner firms: high-FSID loser firms lose more than low-FSID loser firms, while high-FSID winner firms win more than low-FSID winner firms. High-FSID firms are firms with greater uncertainties related to their fundamentals; these are slightly larger growth firms, have higher dispersion among analysts about their future earnings, pay low dividends, have higher costs of goods, have higher volatility around their profitability, and actively perform major corporate events.

• Kelly, Bryan T. and Moskowitz, Tobias J. and Pruitt, Seth: Understanding Momentum and Reversals

  Abstract: ttps://ssrn.com/abstract=3610814Abstract:Stock momentum, long-term reversal, and other past return characteristics that predict future returns also predict future realized betas, suggesting these characteristics capture time-varying risk compensation. We formalize this argument with a conditional factor pricing model. Using instrumented principal components analysis, we estimate latent factors with time-varying factor loadings that depend on observable firm characteristics. We show that factor loadings vary significantly over time, even at short horizons over which the momentum phenomenon operates (one year), and that this variation captures reliable conditional risk premia missed by other factor models commonly used in the literature. Our estimates of conditional risk exposure can ex- plain a sizeable fraction of momentum and long-term reversal returns and can be used to generate even stronger return predictions.

• Joshipura, Mayank and Joshipura, Nehal: Low-Risk Effect: Evidence, Explanations and Approaches to Enhancing the Performance of Low-Risk Investment Strategies

  Abstract: The authors offer evidence for low-risk effect from the Indian stock market using the top-500 liquid stocks listed on the National Stock Exchange (NSE) of India for the period from January 2004 to December 2018. Finance theory predicts a positive risk-return relationship. However, empirical studies show that low-risk stocks outperform high-risk stocks on a risk-adjusted basis, and it is called low-risk anomaly or low-risk effect. Persistence of such an anomaly is one of the biggest mysteries in modern finance. The authors find strong evidence in favor of a low-risk effect with a flat (negative) risk-return relationship based on the simple average (compounded) returns. It is documented that low-risk effect is independent of size, value, and momentum effects, and it is robust after controlling for variables like liquidity and ticket-size of stocks. It is further documented that low-risk effect is a combination of stock and sector level effects, and it cannot be captured fully by concentrated sector exposure. By integrating the momentum effect with the low-volatility effect, the performance of a low-risk investment strategy can be improved both in absolute and risk-adjusted terms. The paper contributed to the body of knowledge by offering evidence for: a) robustness of low-risk effect for liquidity and ticket-size of stocks and sector exposure, b) how one can benefit from combining momentum and low-volatility effects to create a long-only investment strategy that offers higher risk-adjusted and absolute returns than plain vanilla, long-only, low-risk investment strategy.

• Theissen, Erik and Yilanci, Can, Momentum? What Momentum?

  Abstract: Risk-adjusted momentum returns are usually estimated by constructing momentum portfolios and then running a full-sample regression of their returns on a set of factors (portfolio-level risk adjustment). This approach implicitly assumes constant factor exposure of the momentum portfolio. However, momentum portfolios are characterized by strong turnover and time-varying factor exposure. We propose to estimate the risk exposure at the stock-level. The risk-adjusted return of the momentum portfolio in month t then is the actual return minus the weighted average of the expected returns of the component stocks (stock-level risk adjustment). Based on evidence from the universe of CRSP stocks, from sub-periods and size-based sub-samples, from volatility-scaled momentum strategies (Barroso and Santa-Clara 2015) and from an international sample covering 22 developed countries we conclude that the momentum effect may be much weaker than previously thought.

• Falck, Antoine and Rej, Adam and Thesmar, David, Is Factor Momentum More than Stock Momentum?

  Abstract: Yes, but only at short lags. In this paper we investigate the relationship between factor momentum and stock momentum. Using a sample of 72 factors documented in the literature, we first replicate earlier findings that factor momentum exists and works both directionally and cross-sectionally. We then ask if factor momentum is spanned by stock momentum. A simple spanning test reveals that after controlling for stock momentum and factor exposure, statistically significant Sharpe ratios only belong to implementations which include the last month of returns. We conclude this study with a simple theoretical model that captures these forces: (1) there is stock-level mean reversion at short lags and momentum at longer lags, (2) there is stock and factor momentum at all lags and (3) there is natural comovement between the PNLs of stock and factor momentums at all horizons.

• Vora, Premal P.: Trading and Market Efficiency in Summer

  Abstract: The fall in stock-market trading during summer has real effects on stock-market efficiency. I examine the market efficiency of momentum, post-announcement earnings drift, and idiosyncratic volatility (IVOL). The profitability of a momentum winner-loser strategy is significantly enhanced in summer, thus accentuating momentum-related inefficiency. For positive unexpected earnings in summer, market inefficiency is attenuated, but for negative unexpected earnings market inefficiency is accentuated. The IVOL inefficiency is an exclusively summer effect. Once this effect is controlled for, a positive relation emerges between IVOL quintiles and alphas. Overall, market inefficiency appears to be accentuated in summer due to the fall in trading.

• Goyal, Amit and Jegadeesh, Narasimhan and Subrahmanyam, Avanidhar: What Explains Momentum? A Perspective From International Data

  Abstract: There is as yet no consensus on why equity markets permit momentum, although the literature proposes several explanations. Our analysis uses out-of-sample international data to consider a “horse race” across existing empirical proxies for momentum rationales used by earlier studies. Our central finding in cross-sectional analyses is that the proxy for thefrog-in-the-pan (FIP) hypothesis, which posits that due to limited attention, investors underreact to information that arrives gradually rather than in concentrated doses, consistently wins. Also, internationally, momentum is stronger in less volatile markets and in up-markets. The FIP proxy indicates that information flows more gradually during these market states, implying additional support for the hypothesis.

• Gao, Xiang and Koedijk, Kees and Walther, Thomas and Wang, Zhan: Relative Investor Sentiment Measurement

  Abstract: This paper proposes a new metric to gauge investor sentiment using a relative valuation method. We combine investor behavioral finance traits and option-implied standard deviations under both the real-world probability (P) valued most in the view of uninformed investors and the risk-neutral space (Q) adopted when there exists no cognitive error. Given that investor sentiment can be thought of as risk-taking by the uninformed exceeding their informed peers, we postulate that the differences between the variance, skewness, and kurtosis of P and Q measures for investors with various behavioral traits matter. We hence construct our investor sentiment proxy by summing these differentials of variance, skewness, and kurtosis in weighted forms. It is documented that such relative investor sentiment metric exhibits economically and statistically strong return predictability for momentum portfolios. Our findings contribute to the extant literature by (1) complementing the Baker-Wurgler market-based investor sentiment index from the theoretical perspective, (2) modeling investor sentiment via utilizing the informational content of options prices, and (3) supporting the Barberis-Shleifer-Vishny definition of investor sentiment to be differences in financial market participant behavior.