44 Pages Posted: 5 Apr 2017
Date Written: April 5, 2017
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: 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