Momentum? What Momentum?

52 Pages Posted: 14 Oct 2020 Last revised: 29 Jan 2021

See all articles by Erik Theissen

Erik Theissen

University of Mannheim - Finance Area

Can Yilanci

University of Mannheim - Finance Area; University of Mannheim - Graduate School of Economic and Social Sciences

Date Written: October 23, 2020

Abstract

Risk-adjusted momentum returns are usually estimated by constructing momentum portfolios and then running a full-sample regression of their returns on a set of factors (portfolio-level risk adjustment). This approach implicitly assumes constant factor exposure of the momentum portfolio. However, momentum portfolios are characterized by strong turnover and time-varying factor exposure. We propose to estimate the risk exposure at the stock-level. The risk-adjusted return of the momentum portfolio in month t then is the actual return minus the weighted average of the expected returns of the component stocks (stock-level risk adjustment). Based on evidence from the universe of CRSP stocks, from sub-periods and size-based sub-samples, from volatility-scaled momentum strategies (Barroso and Santa-Clara 2015) and from an international sample covering 22 developed countries we conclude that the momentum effect may be much weaker than previously thought.

Suggested Citation

Theissen, Erik and Yilanci, Can, Momentum? What Momentum? (October 23, 2020). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3710496 or http://dx.doi.org/10.2139/ssrn.3710496

Erik Theissen (Contact Author)

University of Mannheim - Finance Area ( email )

Mannheim, 68131
Germany

Can Yilanci

University of Mannheim - Finance Area ( email )

Mannheim, 68131
Germany

University of Mannheim - Graduate School of Economic and Social Sciences ( email )

D7, 27
Mannheim, 68131
Germany

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