Factor Momentum, Industry Momentum, and Their Relationship to Stock Returns

Summary

This review summarizes research on whether factor momentum explains industry momentum. The underlying study ranks factor portfolios by their recent returns, takes long positions in recent winners and short positions in losers, and compares the resulting strategy with industry and stock momentum. It also uses industry neutral factor portfolios to test whether industry exposure could be driving the apparent effect. The evidence, based on US stock data from 1963 to 2016, indicates that factor momentum contains industry momentum: industry momentum loses much of its explanatory power after controlling for factor momentum, while factor momentum remains after controlling for industry momentum and other return factors.

The review reports that momentum appears across many factor sets, though some factors contribute more than others. It also describes relationships with short term reversal, stock momentum, and momentum among portfolios sorted by size and book to market. The findings are historical and depend on the portfolio definitions, sample, and return models used. The article discusses possible explanations such as delayed reactions to information or mispricing but does not establish a definitive mechanism. Its summary cautions that the results do not establish that the strategy is investable in other markets, including China.

Key ideas

• The study forms factor momentum strategies by buying recent factor winners and shorting recent losers.
• Industry neutral factor momentum retains information beyond industry momentum in the reported US sample.
• The review reports that factor momentum appears across varied factor sets, although factor contributions differ.
• Controlling for factor momentum strengthens reported short term reversal and stock momentum effects.
• Historical findings do not establish the effect's cause or its investability in other markets.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.