Overlapping Momentum Portfolios
65 Pages Posted: 7 Apr 2020 Last revised: 2 Jan 2022
Date Written: March 12, 2020
Different momentum investors use different formation periods to evaluate past stock performance. We show theoretically that the concurrence of trades from momentum investors with heterogeneous formation periods can enhance the autocorrelation of asset returns. Empirically, stocks in the intersection of the 6 and 12-month momentum portfolios--``overlapping'' momentum stocks--display superior medium-term returns than stocks that are not. This finding is robust to considering a broad set of risk factors and alternative explanations. In line with our theory, overlapping momentum stocks sustain high volume and their differential returns are higher among stocks with fast information diffusion. We confirm that focusing on overlapping momentum stocks improves the performance of a number of momentum-based strategies proposed in the literature.
Keywords: Momentum, Asset pricing, Market anomalies, Market efficiency
JEL Classification: G12, G14
Suggested Citation: Suggested Citation