Working Paper: NBER ID: w20984
Authors: Robert Novy-Marx
Abstract: Momentum in firm fundamentals, i.e., earnings momentum, explains the performance of strategies based on price momentum. Earnings surprise measures subsume past performance in cross sectional regressions of returns on firm characteristics, and the time-series performance of price momentum strategies is fully explained by their covariances with earnings momentum strategies. Controlling for earnings surprises when constructing price momentum strategies significantly reduces their performance, without reducing their high volatilities. Controlling for past performance when constructing earnings momentum strategies reduces their volatilities, and eliminates the crashes strongly associated with momentum of all types, without reducing the strategies' high average returns. While past performance does not have independent power predicting the cross section of expected returns, it does predicts stock comovements, and is thus important for explain cross sectional variation in realized returns.
Keywords: Momentum; Earnings Momentum; Price Momentum
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| earnings momentum (G14) | price momentum (C69) |
| past performance (C52) | returns (Y60) |
| earnings surprises (G14) | returns (Y60) |
| controlling for past performance (C52) | stability of earnings momentum strategies (C41) |