Momentum factor
TheoryDefinition
The tendency of stocks that have risen over the past 6–12 months to keep rising for another 3–6 months. Identified by Jegadeesh and Titman (1993) and one of the most robust factors in academic literature.
Historical premium: ~6–8% per year, the highest of any equity factor. But momentum has sharp crash risk — the 2009 rally off the GFC lows wiped out 12 months of momentum returns in weeks, because the former losers became the leaders.
Behavioral mechanism: investors underreact to news, then chase trends. Information diffuses slowly. Quantitative explanation: attention, anchoring, herding.
Historical premium: ~6–8% per year, the highest of any equity factor. But momentum has sharp crash risk — the 2009 rally off the GFC lows wiped out 12 months of momentum returns in weeks, because the former losers became the leaders.
Behavioral mechanism: investors underreact to news, then chase trends. Information diffuses slowly. Quantitative explanation: attention, anchoring, herding.
Example
MTUM (iShares MSCI USA Momentum Factor) holds S&P 500 stocks with the strongest 6- and 12-month returns, rebalanced semiannually. CAGR ~14% 2013–2023 versus S&P 500 ~11% — the momentum factor delivered, but with sharp turns and higher tracking error.
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