The Idiosyncratic Momentum Anomaly

44 Pages Posted: 5 Apr 2017  

David Blitz

Robeco Asset Management - Quantitative Strategies

Matthias X. Hanauer

Robeco Asset Management - Quantitative Strategies; Technische Universität München (TUM)

Milan Vidojevic

VU University Amsterdam, Finance; Robeco Asset Management

Date Written: April 5, 2017

Abstract

Sorting stocks into portfolios on their idiosyncratic, as opposed to total past returns generates returns that are anomalous from the standpoint of any commonly employed factor asset pricing model. Our contribution to the literature is fourfold: (i) we show that idiosyncratic momentum is priced in the cross-section of stock returns, and that it cannot be subsumed by any of the established asset pricing factors, including conventional momentum; (ii) we review some of the most prominent explanations for the sources of the momentum premium, such as non-linear crash risk, investor overconfidence, and overreaction, and show that none of them explain the superiority of idiosyncratic over conventional momentum; (iii) we bolster the link between idiosyncratic momentum profits and underreaction by showing that idiosyncratic momentum forecasts high long-term excess returns, and that it can be used to differentiate between high momentum stocks whose future returns reverse, and those whose do not; (iv) we provide evidence for the anomaly in markets outside of the U.S. where the effect was originally discovered.

Keywords: asset pricing, idiosyncratic momentum, momentum crashes, risk management

JEL Classification: G11, G12, G14

Suggested Citation

Blitz, David and Hanauer, Matthias X. and Vidojevic, Milan, The Idiosyncratic Momentum Anomaly (April 5, 2017). Available at SSRN: https://ssrn.com/abstract=2947044

David Blitz

Robeco Asset Management - Quantitative Strategies ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Matthias Xaver Hanauer

Robeco Asset Management - Quantitative Strategies ( email )

Coolsingel 120
Rotterdam, 3011 AG
Netherlands

HOME PAGE: http://www.robeco.com/en/about-us/quantitative-research-team.jsp

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.fm.wi.tum.de/?id=31

Milan Vidojevic (Contact Author)

VU University Amsterdam, Finance ( email )

De Boelelaan 1105
Amsterdam
Netherlands

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

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