Why momentum concentrates among overvalued stocks?

Jack Favilukis and Terry Zhang

Review of Finance, 2024, vol. 28, issue 2, 389-412

Abstract: We uncover a link between momentum and overvaluation: assets that generate strong momentum profits have lower risk-adjusted unconditional returns; conversely, trading momentum within overvalued assets doubles the profit of the standard momentum strategy. We compute the profits of a momentum strategy within various portfolios; portfolios within which momentum is profitable are defined as momentum trading opportunity (MTO). High-MTO assets have negative unconditional alphas and concentrate in the short legs of most anomalies; controlling for MTO reduces anomaly alphas by up to half. These results imply that the existence of other anomalies is closely linked to the existence of momentum and they should be studied jointly.

Keywords: momentum; anomalies (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2024
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