Separating Factor Momentum from Stock Momentum

Summary

The study examines whether factor momentum contains return information beyond stock momentum. Using a sample of 72 factors reported in prior literature, it first reproduces evidence for both directional and cross-sectional factor momentum. It then applies a spanning test that controls for stock momentum and factor exposure to assess whether factor momentum remains distinct.

The reported result is that statistically significant Sharpe ratios after these controls occur only in implementations that include the most recent month of returns. The paper also proposes a theoretical account combining short-lag stock mean reversion with longer-lag stock momentum, alongside stock and factor momentum across lags and co-movement between their profit-and-loss streams. The excerpt does not give factor definitions, sample dates, test specifications, or robustness results, so it offers limited detail for evaluating the magnitude or generality of the findings. Its conclusion is specifically about short-lag implementations.

Key ideas

• The study compares factor momentum with stock momentum using 72 previously documented factors.
• Factor momentum is reported in both directional and cross-sectional implementations.
• After controlling for stock momentum and factor exposure, significant Sharpe ratios remain only when the latest month is included.
• The proposed model combines short-lag stock mean reversion with longer-lag stock momentum.
• Stock and factor momentum profit-and-loss streams are described as naturally co-moving across horizons.

Tags

# Is Factor Momentum More than Stock Momentum?


# Is Factor Momentum More than Stock Momentum?









Yes, but only at short lags. In this paper we investigate the relationship between factor momentum and stock momentum. Using a sample of 72 factors documented in the literature, we first replicate earlier findings that factor momentum exists and works both directionally and cross-sectionally. We then ask if factor momentum is spanned by stock momentum. A simple spanning test reveals that after controlling for stock momentum and factor exposure, statistically significant Sharpe ratios only belong to implementations which include the last month of returns. We conclude this study with a simple theoretical model that captures these forces: (1) there is stock-level mean reversion at short lags and momentum at longer lags, (2) there is stock and factor momentum at all lags and (3) there is natural comovement between the PNLs of stock and factor momentums at all horizons.

Shown in full with attribution under the source's licence. Licence: abstract CC0

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