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Stocks that have been going up tend to continue going up.
Momentum is perhaps the most persistent anomaly in financial markets. First documented by Jegadeesh and Titman in 1993, the momentum effect shows that stocks with strong 6-12 month price performance tend to continue outperforming over the next 3-12 months. This pattern has been found in virtually every stock market worldwide and across asset classes.
The economic rationale for momentum includes behavioral biases like anchoring (investors slowly update beliefs), herding (institutional investors follow trends), and the disposition effect (investors sell winners too early and hold losers too long). These biases create predictable patterns in stock prices that systematic strategies can exploit.
The momentum premium has been remarkably persistent, surviving for decades after its academic discovery. However, momentum is also the most volatile factor — it can suffer sharp reversals during market regime changes, as happened in the 2009 "momentum crash."
Our momentum score uses pure price momentum — three lookback windows, each percentile-ranked within sector peers:
• 12-1 Month Price Momentum (50% weight) — 12-month total return skipping the most recent month, the canonical Jegadeesh-Titman (1993) signal
• 6-Month Price Return (30% weight) — Intermediate-term trend strength
• 3-Month Price Return (20% weight) — Short-term trend confirmation
The "skip month" on the 12-month return avoids the well-documented short-term reversal effect. We keep momentum as a pure price signal following AQR's practice of separating price-based from fundamental-based signals. Revenue momentum is captured separately in our Investment & Growth factor. Momentum receives a 25% weight in our composite.
Jegadeesh, N. & Titman, S. (1993)
“Returns to Buying Winners and Selling Losers”
Journal of Finance
Asness, C., Moskowitz, T., & Pedersen, L. (2013)
“Value and Momentum Everywhere”
Journal of Finance
Daniel, K. & Moskowitz, T. (2016)
“Momentum Crashes”
Journal of Financial Economics
The momentum factor is an investment strategy that buys stocks with strong recent price performance and avoids (or sells) stocks with weak performance. Academic research since 1993 confirms this "trend-following" approach delivers significant excess returns across markets.
Momentum effects are strongest over 3-12 month horizons. After about 12 months, the effect weakens, and at very long horizons (3-5 years), returns tend to reverse. Our model uses pure price momentum across 3, 6, and 12-month lookback windows, all ranked within sector peers.
Momentum is driven by behavioral biases: slow information diffusion (investors gradually react to news), herding behavior (institutional investors follow trends), and the disposition effect (investors sell winners too early). These create predictable price patterns.
Yes. Momentum strategies can suffer sharp reversals during market regime changes — most notably in March 2009 when momentum "crashed" as beaten-down stocks surged while former winners fell. Combining momentum with value and quality factors helps mitigate crash risk.
Momentum has low or negative correlation with value — creating diversification benefits. When momentum struggles (market reversals), value tends to outperform, and vice versa. Our composite model uses this natural hedge by weighting both factors.