A very few stock market anomalies are documented as well as the momentum effect. The momentum effect has not disappeared (or weakened) even after the strategy was made publicly known. Momentum interacts very well with other market anomalies, and a combined strategy is usually more successful than its parts.
The firm-level asset expansion (measured as the growth in balance sheet total assets) is one such partner. Academic research shows that momentum profits are especially strong and are highly statistically significant for stocks with high past asset growth. The positive relationship between asset growth and momentum remains strong even after adjustments for the market value of equity, book-to-market, share turnover, return volatility, or credit rating.
* For those interested in systematic quantitative momentum factor ETF implementation, here is a link to the Alpha Architect Quantitative Momentum ETF (strategy background), our partner. *
Academic research shows that the existing literature does not offer clear answers as to why firm investment, measured by asset growth, should be connected to return continuation. However, results from this academic study are highly statistically significant and based on a long data sample. The interaction between asset growth and momentum survives the inclusion of the number of control variables. Confidence in this combined strategy, therefore, could be high.
Backtest period from source paper
Confidence in anomaly's validity
Notes to Confidence in Anomaly's Validity
Notes to Indicative Performance
per annum, annualized (geometrically) monthly return 1,3%, data from table 2 panel B-II for long short strategy which excludes January
Period of Rebalancing
Notes to Period of Rebalancing
Notes to Estimated Volatility
estimated from t-statistic (5.04) from table 2 panel B-II
Number of Traded Instruments
Notes to Number of Traded Instruments
more or less, it depends on investor’s need for diversification
Notes to Maximum drawdown
Notes to Complexity Evaluation
Simple trading strategy
The investment universe consists of NYSE, AMEX, and NASDAQ stocks (data for the backtest in the source paper are from Compustat). Stocks with a market capitalization less than the 20th NYSE percentile (smallest stocks) are removed. The asset growth variable is defined as the yearly percentage change in the balance sheet total assets. Data from year t-2 to t-1 are used to calculate asset growth, and July is the cut-off month. Every month, stocks are then sorted into deciles based on asset growth, and only stocks with the highest asset growth are used. The next step is to sort stocks from the highest asset growth decile into quintiles, based on their past 11-month return (with the last month’s performance skipped in the calculation). The investor then goes long on stocks with the strongest momentum and short on stocks with the weakest momentum. The portfolio is equally weighted and is rebalanced monthly. The investor holds long-short portfolios only during February-December -> January is excluded as this month has been repeatedly documented as a negative month for a momentum strategy (see “January Effect Filter and Momentum in Stocks”).
Hedge for stocks during bear markets
Yes - Based on the source research paper (see Table IV), the strategy has a significantly positive return during recession months (as defined by NBER); therefore, it probably can be used as a hedge/diversification to equity market risk factor during bear markets.
Out-of-sample strategy's implementation/validation in QuantConnect's framework