Decomposing Momentum: The Forgotten Component

83 Pages Posted: 19 Jul 2021 Last revised: 10 Dec 2022

See all articles by Pascal Büsing

Pascal Büsing

University of Münster - Finance Center Münster

Hannes Mohrschladt

University of Muenster - Finance Center

Susanne Siedhoff

University of Muenster - Finance Center

Date Written: July 15, 2021

Abstract

We split up the standard momentum return over months t-12 to t-2 at the highest stock price within this formation period. Of the overall momentum profits in month t, 84% can be attributed to the return prior to this peak price although research has exclusively focused on the post-peak return so far. The return predictability of the forgotten component is consistent with investor underreaction as underlying mechanism. Contrary to standard momentum strategies, the corresponding long-short returns are positively skewed, avoid momentum crashes, show no market state dependence, and yield consistent return premiums in both the US and international stock markets.

Keywords: Momentum, 52-week high, Momentum crashes, Underreaction, Cross-section of stock returns

JEL Classification: G11, G12

Suggested Citation

Büsing, Pascal and Mohrschladt, Hannes and Siedhoff, Susanne, Decomposing Momentum: The Forgotten Component (July 15, 2021). Available at SSRN: https://ssrn.com/abstract=3887512 or http://dx.doi.org/10.2139/ssrn.3887512

Pascal Büsing

University of Münster - Finance Center Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

Hannes Mohrschladt (Contact Author)

University of Muenster - Finance Center ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/en/the-fcm/lsf/team/hannes-mohrschladt

Susanne Siedhoff

University of Muenster - Finance Center ( email )

Universitätsstraße 14-16
Muenster, DE 48143
Germany

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