The factors tested were typical “off-the-shelf” factors and have been published in academic journals.Ģ. If the previous year’s returns were negative, the average dropped to 6 bps, a significant difference. The average return for the 20 factors studied was 51 bps monthly when the previous year produced positive returns. The prior returns of factors provide information about their future returns. The analysis proceeds through a number of steps.ġ. Profits from factor momentum can be captured by a strategy that times other factors. The research presented here maintains that factor momentum is not separate and distinct from other factors, but is primarily associated with the timing of other factors. Explanations of the source of profitability for momentum strategies have traditionally relied on behavioral biases on the part of investors, time-varying risk premiums, or trading frictions. Want to read our summaries of academic finance papers? Check out our Academic Research Insight category.īreaking new ground, the authors present a novel view on the nature and source of “ momentum” that differs from our current understanding of momentum, whether it be industry momentum, residual, or any other version of momentum.A version of this paper can be found here.In this article we explore research, academic insights, and the questions pertaining to momentum as a separate risk factor.
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