Is Momentum Really Momentum?
Read the paperopens doi.org in a new tab
What they found
Novy-Marx split the standard 12-month momentum lookback into pieces and asked which part carries the signal. Using U.S. stocks from 1926 to 2010, he found that returns from 7 to 12 months ago predicted future returns far better than returns from the most recent 6 months. In other words, momentum looks less like 'the trend continues' and more like 'stocks that did well a while ago keep doing well', which he called an echo rather than a continuation. The result also held in international stocks, industries, commodities, and currencies.
What you can use
- How you define the lookback matters: the 7 to 12 month window drives most of the effect, and the most recent months add little.
- This challenges the intuition that momentum is about catching a move in progress.
- If you use a momentum screen, test whether the recent-months component is actually helping or just adding turnover.
Caveats
Other researchers (including Goyal and Jegadeesh) have argued the intermediate-horizon advantage is weaker in other samples and depends on methodology. Long-short factor construction, gross of costs.
Tags: momentum, equities, signal-construction
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.