Broad-market return persistence and momentum profits

摘要

Momentum profits are shown to be driven by the broad-market persistence of returns between the formation period and the holding period, which is measured as the slope coefficient of the regression of the cross-section returns in the holding period on the cross-section returns in the formation period. Broad-market persistence offers an understanding on momentum profits from a market-wide perspective that goes beyond the stock-specific continuation of extreme winners and losers as proposed in Jegadeesh and Titman [N. Jegadeesh, S. Titman, Returns to buying winners and selling losers: implication for stock market efficiency, Journal of Finance 48 (1993) 65-91] and Grundy and Martin [B.D. Grundy, S.J. Martin, Understanding the nature of risks and the sources of rewards to momentum investing. Review of Financial Studies 14 (2001) 29-78]. The proposed framework provides an alternative explanation to the inability of widely accepted asset pricing models in explaining momentum profits.