Fundamental momentum and enhanced fundamental momentum: Evidence from the Chinese stock market

Abstract

We use fundamental information to select stocks and construct fundamental momentum in this paper. We use LASSO to select eight fundamental variables from 27 fundamental characteristics mentioned in the previous literature. Then, we integrate these 8 variables into a proxy named FIR (fundamental implies return) as the sorting variable of fundamental momentum. Fundamental momentum generates a monthly return of 1.100%, and it outperforms other single factor fundamental strategies. Furthermore, we show that the abnormal returns of fundamental momentum are due to investors’ limited attention. Moreover, we find that fundamental factors and price factors are complementary in forecasting future returns, and combining price reversal and fundamental momentum into enhanced fundamental momentum earns a 2.107% monthly return.