Testing a Twelve-Month Momentum Factor with Quantile Returns

Summary

This research notebook outlines a simple test of whether stocks with stronger prior returns tend to earn higher returns next day. It measures momentum from prices over a twelve-month window while omitting the latest month, then computes next-day returns. The omission follows a convention the notebook attributes to academic research and is intended to keep the most recent month out of the ranking signal.

The method ranks observations into momentum quantiles and compares the average next-day return in each group. A predictive momentum relationship would be suggested if higher-ranked groups have stronger subsequent returns. The example uses a small demo universe and recommends only two bins for that limited sample. It presents the procedure and a plot, but supplies no numerical findings or evidence that the factor worked. The test is preliminary: it evaluates a simple one-day outcome and does not address portfolio construction, transaction costs, risk adjustment, or robustness across universes and periods.

Key ideas

• The momentum signal uses returns over twelve months and skips the most recent month.
• The proposed diagnostic compares next-day average returns across momentum-ranked quantiles.
• Higher momentum groups should have higher subsequent returns if the factor is predictive.
• The example is a preliminary factor check and does not establish net strategy performance.

Tags

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