What Can Explain Momentum? Evidence from Decomposition

Guo, Jiaqi; Li, Peng; Li, Youwei

Abstract

This study comprehensively evaluates and ranks a large number of competing explanations for the momentum anomaly. As a benchmark for evaluation, firm fundamentals are found to be the most promising among well-known explanations of momentum, followed by prospect theory and mental accounting, and anchoring effect. Collectively, all explanations capture 31% of momentum, whereas 69% of momentum remains unexplained. This study thoroughly examines what fractions of the momentum anomaly emerge from the interaction effects between past returns and various firm characteristics. It is further found that strategies based on firm characteristics and residual momentum can significantly alleviate the severity of momentum crashes. Finally, robustness analysis is provided for choosing different formation and holding periods, excluding January observations, and analyze at the level of portfolio rather than individual stock.

Citation

Guo, J., Li, P., & Li, Y. (2022). What Can Explain Momentum? Evidence from Decomposition. Management Science, 68(8), 6184-6218. https://doi.org/10.1287/mnsc.2021.4135

• Journal Article Type: Article
• Acceptance Date: May 21, 2021
• Online Publication Date: Dec 29, 2021
• Publication Date: Aug 1, 2022
• Deposit Date: Jan 1, 2022
• Publicly Available Date: Jan 6, 2022
• Journal: Management Science
• Print ISSN: 0025-1909
• Electronic ISSN: 1526-5501
• Publisher: Institute for Operations Research and Management Sciences
• Peer Reviewed: Peer Reviewed
• Volume: 68
• Issue: 8
• Pages: 6184-6218
• DOI: https://doi.org/10.1287/mnsc.2021.4135
• Keywords: Momentum; Momentum candidate variables; Momentum decomposition; Momentum crashes
• Public URL: https://hull-repository.worktribe.com/output/3904798