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Ubiquitous Equity Factor Momentum?

April 29, 2019 • Posted in Momentum Investing

Do returns for equity factors (long stocks with high expected returns and short stocks with low expected returns based on some firm/stock trading characteristic) broadly and reliably exhibit momentum? In other words, do factors with strong (weak) returns in recent months have strong (weak) returns next month? In the February 2019 revision of their paper entitled “Factor Momentum Everywhere”, Tarun Gupta and Bryan Kelly test return momentum among 65 widely studied long-short equity factors for the U.S. and 62 factors globally that have underlying data available since the mid-1960s, including: valuation ratios (such as earnings-to-price and book-to-market); size, investment and profitability metrics (such as market capitalization, sales growth and return on equity); idiosyncratic risk metrics (such as betting against beta, stock volatility and skewness); and, liquidity metrics (such as Amihud illiquidity, share volume and bid-ask spread). For each factor, they each month:

  • Exclude as outliers the top and bottom 1% of stocks with the most extreme factor characteristic values.
  • Split residual stocks into big and small size segments based on median NYSE market capitalization for U.S. stocks and 80th percentile of market capitalizations for international stocks.
  • Within size segments, sort stocks into low/medium/high characteristic bins based on 30/40/30 percentile splits and form value-weighted sub-portfolios that are long (short) high (low) bins.
  • Form an overall factor portfolio with long side 0.5 * (Large High + Small High) and short side 0.5 * (Large Low + Small Low).

They consider both time series factor momentum (TSFM, intrinsic or absolute momentum) and cross-sectional factor momentum (CSFM, relative momentum). As benchmarks, they consider the equal-weighted average return for all factors and a conventional stock momentum factor based on returns from 12 months to one month ago. Using monthly U.S. and global data required to construct the factor portfolios and their returns from 1965 through 2017, they find that: (more…)

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