The Power of Past Stock Returns to Explain Future Stock Returns
48 Pages Posted: 8 Nov 2016
Date Written: January 1, 1995
Researchers have long argued over whether strategies based on past stock returns have power to explain future stock returns. This paper finds no convincing evidence that either short-run or long-run contrarian strategies represent important factors for explaining the cross-section of stock returns. In contrast, the properly specified one-year momentum strategy has explanatory power for stock returns when used alone, when tested against size and book-to-market, and when subjected to exhaustive robustness checks. We conclude that one-year momentum represents a necessary third factor, along with firm size and book-to-market, for explaining the cross-section of stock returns.
Keywords: Asset Pricing, Factor Investing, Momentum Factor, Book-To-Market Factor, Cross Section of Stock Returns
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