Why momentum concentrates among overvalued stocks

82 Pages Posted: 7 Sep 2019 Last revised: 13 Sep 2023

See all articles by Jack Y Favilukis

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance

Terry Zhang

Australian National University (ANU)

Date Written: August 28, 2019

Abstract

We uncover a link between momentum and overvaluation: assets that generate strong momentum profits have lower risk-adjusted unconditional returns, conversely, trading momentum within overvalued assets doubles the profit of the standard momentum strategy. We compute the profits of a momentum strategy within various portfolios; portfolios within which momentum is profitable are defined as momentum trading opportunity (MTO). High MTO assets have negative unconditional alphas and concentrate in the short legs of most anomalies; controlling for MTO reduces anomaly alphas by up to half. These results imply that the existence of other anomalies is closely linked to the existence of momentum and they should be studied jointly.

Keywords: Momentum, Anomalies

JEL Classification: G11, G12, G14

Suggested Citation

Favilukis, Jack Y and Zhang, Terry, Why momentum concentrates among overvalued stocks (August 28, 2019). Available at SSRN: https://ssrn.com/abstract=3444342 or http://dx.doi.org/10.2139/ssrn.3444342

Jack Y Favilukis (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Terry Zhang

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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