The Momentum Gap and Return Predictability

Simon Huang

The Review of Financial Studies, 2022, vol. 35, issue 7, 3303-3336

Abstract: The formation period return difference between past winners and losers, which I call the momentum gap, negatively predicts momentum profits. I document this for the U.S. stock market and find consistent results across 21 major international markets. A one-standard-deviation increase in the momentum gap predicts a 1.25 decrease in the monthly momentum return after controlling for existing predictors. This predictability extends up to 5 years for static momentum portfolios, consistent with time-varying investor biases. Following the simple real-time strategy of investing in momentum only when the momentum gap is below the 80th percentile delivers a Sharpe ratio of 0.78.

JEL-codes: G12 G14 G40 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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