Momentum? What Momentum?

Abstract

Momentum portfolios are characterized by high turnover and time-varying factor exposure. They load positively (negatively) on factors with positive (negative) realizations during the formation period. However, the conventional risk adjustment, a full-sample portfolio-level regression, implicitly assumes constant factor exposure. We adjust for risk at the stock-level and control for time-varying factor exposure. We find that momentum returns are much smaller than previously thought, and that the Fama and French (2015) 5-factor model explains unconditional momentum returns well. Our findings also confirm recent evidence (Ehsani and Linnainmaa 2022) that momentum in stock returns is driven by factor momentum.

Keywords: Momentum, Risk adjustment, Time-series regression

JEL Classification: C58, G12