What Can Explain Momentum? Evidence from Decomposition

Jiaqi Guo (), Peng Li () and Youwei Li
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Jiaqi Guo: Birmingham Business School, University of Birmingham,, Birmingham B15 2TT, United Kingdom
Peng Li: Accounting and Finance Division, Leeds University Business School, University of Leeds, Leeds LS2 9JT, United Kingdom

Management Science, 2022, vol. 68, issue 8, 6184-6218

Abstract: This study comprehensively evaluates and ranks a large number of competing explanations for the momentum anomaly. As a benchmark for evaluation, firm fundamentals are found to be the most promising among well-known explanations of momentum, followed by prospect theory and mental accounting, and anchoring effect. Collectively, all explanations capture 31% of momentum, whereas 69% of momentum remains unexplained. This study thoroughly examines what fractions of the momentum anomaly emerge from the interaction effects between past returns and various firm characteristics. It is further found that strategies based on firm characteristics and residual momentum can significantly alleviate the severity of momentum crashes. Finally, robustness analysis is provided for choosing different formation and holding periods, excluding January observations, and analyze at the level of portfolio rather than individual stock.

Keywords: momentum; momentum candidate variables; momentum decomposition; momentum crashes (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:8:p:6184-6218

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