Fundamentally, Momentum is Fundamental Momentum

44 Pages Posted: 2 Mar 2015

See all articles by Robert Novy-Marx

Robert Novy-Marx

Simon Business School, University of Rochester; National Bureau of Economic Research (NBER)

Date Written: February 2015

Abstract

Momentum in firm fundamentals, i.e., earnings momentum, explains the performance of strategies based on price momentum. Earnings surprise measures subsume past performance in cross sectional regressions of returns on firm characteristics, and the time-series performance of price momentum strategies is fully explained by their covariances with earnings momentum strategies. Controlling for earnings surprises when constructing price momentum strategies significantly reduces their performance, without reducing their high volatilities. Controlling for past performance when constructing earnings momentum strategies reduces their volatilities, and eliminates the crashes strongly associated with momentum of all types, without reducing the strategies' high average returns. While past performance does not have independent power predicting the cross section of expected returns, it does predicts stock comovements, and is thus important for explain cross sectional variation in realized returns.

Suggested Citation

Novy-Marx, Robert, Fundamentally, Momentum is Fundamental Momentum (February 2015). NBER Working Paper No. w20984. Available at SSRN: https://ssrn.com/abstract=2572143

Robert Novy-Marx (Contact Author)

Simon Business School, University of Rochester ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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