The Anatomy of Factor Momentum
73 Pages Posted: 6 Feb 2020 Last revised: 18 Jun 2021
Date Written: March 23, 2021
Do factor momentum stem from predictable factor dynamics or from their mechanical exposure to factor risk premia? To provide an answer to this question, we derive a novel theoretical decomposition of factor momentum into a buy-and-hold and a pure factor timing portfolio. Using 210 US equity factors, we show that factor premiums robustly account for a dominant fraction of the total factor momentum return. Because predictability is empirically too weak, the buy-and-hold portfolio outperforms factor momentum and survives the post-publication decay of factor returns. This evidence is also prevalent in different investment sets, different formation and holding periods, and global factors.
Keywords: Factor momentum, time-series predictability, factor timing portfolio, buy-and-hold portfolio
JEL Classification: G11, G12, G17
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