Momentum is Not an Anomaly

46 Pages Posted: 4 Nov 2007

See all articles by Robert F. Dittmar

Robert F. Dittmar

University of Michigan, Stephen M. Ross School of Business

Gautam Kaul

University of Michigan, Stephen M. Ross School of Business

Qin Lei

University of Michigan at Ann Arbor

Date Written: October 2007

Abstract

In this paper, we develop a new approach to test whether momentum is indeed an anomaly in that it reflects delayed reactions, or continued overreactions, to firm specific news. Our methodology does not depend on a specific model of expected returns and, more importantly, does not require a decomposition of momentum profits. Yet we provide distinct testable predictions that can discriminate between the two diametrically opposed causes for the profitability of momentum strategies: time-series continuation in the firm-specific component of returns, and cross-sectional differences in expected returns and systematic risks of individual securities. Our results show that, contrary to the common belief in the profession, momentum is not an anomaly; we find no evidence of continuation in the idiosyncratic component of individual-security returns. The evidence is instead consistent with momentum being driven entirely by cross-sectional differences in expected returns and risks of individual securities.

Suggested Citation

Dittmar, Robert F. and Kaul, Gautam and Lei, Qin, Momentum is Not an Anomaly (October 2007). Available at SSRN: https://ssrn.com/abstract=1027057 or http://dx.doi.org/10.2139/ssrn.1027057

Robert F. Dittmar

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Gautam Kaul (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109-1234
United States
734-764-9594 (Phone)
734-647-6861 (Fax)

Qin Lei

University of Michigan at Ann Arbor ( email )

Ross School of Business
701 Tappan Street
Ann Arbor, MI 48109-1234
United States

HOME PAGE: http://leiq.bus.umich.edu

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