Exploiting Simple Information Ignored by Conventional Momentum

Can investors exploit the definition of conventional 12-2 stock momentum (long the tenth, or decile, of stocks with the highest returns from 12 months ago to two months ago and short the decile with the lowest) to form more persistent momentum portfolios? In the April 2025 revision of their paper entitled “Momentum at Long Holding Periods”, Paul Calluzzo, Fabio Moneta and Selim Topaloglu address the tradeoff between momentum portfolio reformation frequency (turnover) and returns by exploiting the predictability of future momentum. They first assess exclusion of stocks that: will exit the conventional portfolio next month based on known 11-1 returns (filter 11-1); and, are suffering short-term reversal as indicated by absence from the 11-2 momentum portfolio (filter 11-2). They generalize these ideas as two distinct strategies:

1. Generalized Filter (concentrated) – for each holding interval k, the filter k monthly portfolio consists of stocks that are always in the long or short sides over every window from 12-2 to (12−k+1)-2. For example, the filter 3 portfolio is long (short) stocks in the top (bottom) decile of returns for all of 12-2, 11-2, and 10-2 ranking windows.
2. Blended (diversified) – for each holding interval k, the blended k monthly portfolio assigns 1/k weight to returns for each stock in each window from 12-2 to (12−k+1)-2 before ranking stocks into deciles. For example, the blended 4 portfolio assigns one-fourth weight to the returns for each stock for each of the 12-2, 11-2, 10-2, and 9-2 windows before ranking stocks into deciles and forming a portfolio that is long (short) stocks in the top (bottom) decile.

Both strategies therefore have overlapping monthly portfolios. Their baseline level of round-trip (buy and sell) trading frictions is 0.25%, but they also test levels of 0.125% and 0.375%. Using monthly returns for all U.S. NYSE/AMEX/NASDAQ common stocks, excluding utilities, financials and stocks priced under $5, during January 1927 through December 2022, they find that:

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