Momentum at Long Holding Periods

Abstract

This paper examines how a unique feature of the academic definition of momentum, which is constructed with a one-month lag, can help infer which stocks will exhibit momentum in the future. We use this information to develop portfolio formation rules that maintain high exposure to momentum over long horizons. Relative to established methodologies for momentum, our proposed strategies can: (1) reduce turnover; (2) lower risk; (3) boost capacity; and (4) increase returns. Using conservative assumptions on the relation between portfolio turnover and trading costs, we estimate that these portfolio formation rules can increase the net (of trading costs) annual returns of momentum strategies by up to five percentage points and increase the resilience of momentum to post-publication return decay. 

Keywords: Momentum, Long holding periods, Trading costs, Post-publication decay, Anomalies, Cross-section of stock returns