Twin Momentum: Fundamental Trends Matter
64 Pages Posted: 9 Jan 2017 Last revised: 10 Jan 2019
Date Written: January 7, 2019
Using time-series trends of a set of firms’ major fundamentals, we find that there is a fundamental
momentum in the stock market. Buying stocks in the top quintile of fundamental trends and selling stocks in the bottom quintile earns a monthly average return of 0.88%, whose magnitude is comparable to price momentum. Combining price momentum and fundamental momentum produces a twin momentum, earning an average return that exceeds the sum of the two momentum returns. Our results show that firm fundamental trends play an economically much more important role than previously thought. Theoretically, we show that investors can learn from fundamental trends about future stock returns in an equilibrium model, providing an economic rationale for fundamental momentum.
Keywords: Price momentum, Fundamental momentum, Twin momentum, Information diffusion, Sticky expectation
JEL Classification: G12, G14
Suggested Citation: Suggested Citation