Why momentum concentrates among overvalued stocks

76 Pages Posted: 7 Sep 2019 Last revised: 9 Sep 2022

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 overvaluation and momentum: trading momentum
within overvalued assets doubles the profit of the standard momentum strategy. We
identify assets that produce high momentum profits – we call these high Momentum
Trading Opportunities (MTO). High MTO assets have negative unconditional alphas
and concentrate in the short legs of most prominent anomalies. We add heterogeneity
in MTO to the Hong and Stein (1999) momentum model and show that this relationship
between MTO and other anomalies is an equilibrium outcome. Price pressure
on high MTO assets from momentum traders lowers their expected return, thereby
creating anomalies.

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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