Definition
The momentum factor is one of the strongest and most persistent anomalies in finance. Assets that have performed well over the past 3-12 months tend to continue outperforming, while poor performers continue underperforming. Momentum generates 8-12% annual excess return historically but suffers occasional "momentum crashes" during market reversals. The academic consensus attributes momentum to behavioral biases (underreaction, herding).
lightbulb Example
A momentum strategy ranks all stocks by 12-month return (excluding last month). It buys the top decile and shorts the bottom decile. Historically, this spread returns 8-12% annually, though with occasional sharp drawdowns during market reversals.
verified_user Key Points
- One of the strongest documented factor premiums
- Works across asset classes and geographies
- Subject to "momentum crashes" during reversals
- Attributed to behavioral biases (underreaction, herding)