Another Look at Industry Momentum and the Cross Section of Expected Returns

Abstract

This paper investigates whether industry affiliation matters to implementing industry momentum strategies. After discriminating between relevant and redundant industries it shows that only a subset corresponding to less than 50% of the overall market capitalization generates significant momentum payoffs. Industry momentum is only priced in the cross section of expected returns when relevant industries are used as test assets. An out-of-sample experiment utilizing a new double-sorting approach is proposed. It incorporates a learning period to condition momentum strategies on relevant industries and offers evidence that the conditional momentum strategy generates up to 30% higher payoffs than the unconditional counterpart.

Keywords: Industry momentum, Industry affiliation, Industry momentum factor, Asset growth, Credit rating, Cross section of expected returns

JEL Classification: G12, G14