Overlapping Momentum Portfolios
60 Pages Posted: 7 Apr 2020 Last revised: 22 Jun 2020
Date Written: March 12, 2020
Different momentum investors use different time horizons, or formation periods, to evaluate prior stock performance. We show that this heterogeneity has important consequences on asset returns. We provide evidence that heightened trading pressure due to the concurrence of the heterogeneous momentum investors contributes to enhanced return autocorrelation. In particular, U.S. "overlapping" momentum stocks - stocks that are in the intersection of the 6-month and 12- month momentum portfolios - display superior medium-term returns to the momentum strategy that neglects the overlap. The differential returns of the "overlapping" momentum portfolio are robust to the inclusion of a broad set of risk factors and interpretations. The results provide insights on the underlying mechanisms of under and over-reaction in financial markets as the result of limited information investment rules and slow information diffusion.
Keywords: Momentum, Asset pricing, Market anomalies, Market efficiency
JEL Classification: G12, G14
Suggested Citation: Suggested Citation