Explaining Momentum Factors
Since the publication of the study “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency” in 1993, the momentum anomaly—buying past winners and selling past losers, generates abnormal returns in the short run—has received a lot of attention.
This anomaly presents perhaps the greatest challenge to market efficiency, because it could not be explained by conventional risk measures such as standard deviation and the market beta.
Since the publication of that study in the Journal of Finance in 1993, there has been a great amount of research on momentum. Summarizing, subsequent research has found that momentum’s existence is both persistent and pervasive—it exists not only in individual stocks around the globe, but also at the level of national equity markets, in currencies, commodities and bonds. The phenomenon remained an anomaly because there was no risk-based explanation—at least not until Victoria Dobrynskaya’s 2014 paper “Asymmetric Risks of Momentum Strategies.”
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