Why momentum concentrates among overvalued stocks
82 Pages Posted: 7 Sep 2019 Last revised: 13 Sep 2023
Date Written: August 28, 2019
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: Suggested Citation