Is Factor Momentum More than Stock Momentum?

11 September 2020

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Yes, but only at short lags. In this paper we investigate the relationship between factormomentum and stock momentum. Using a sample of 72 factors documented in the literature,we first replicate earlier findings that factor momentum exists and works both directionallyand cross-sectionally. We then ask if factor momentum is spanned by stock momentum. Asimple spanning test reveals that after controlling for stock momentum and factor exposure,statistically significant Sharpe ratios only belong to implementations which include the lastmonth of returns. We conclude this study with a simple theoretical model that captures theseforces: (1) there is stock-level mean reversion at short lags and momentum at longer lags, (2)there is stock and factor momentum at all lags and (3) there is natural comovement betweenthe PNLs of stock and factor momentums at all horizons.

Authors

Antoine Falck , Adam Rej , David Thesmar

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