Overlapping Momentum Portfolios

Abstract

Different momentum investors use different formation periods to evaluate past stock performance. We explore the consequences of this diversity by studying the stocks that are the likely constituents of the portfolios of the heterogeneous momentum investors that coexist in practice. We show that stocks in the intersection of the 6 and 12-month momentum portfolios—"overlapping'' momentum stocks—display enhanced medium-term return momentum. This finding is robust to considering a broad set of risk factors, transaction costs, and alternative explanations. Focusing on overlapping momentum stocks improves the returns of several momentum-based strategies proposed in the literature. The results are in line with the concurrence of trades by heterogeneous momentum investors exacerbating return continuation.

Keywords: Momentum, Asset pricing, Market anomalies, Market efficiency

JEL Classification: G12, G14