Stock Price Momentum Research Articles

Factor momentum versus price momentum: Insights from international markets

Does factor momentum drive stock price momentum? We examine this relationship across 51 countries. Factor momentum proves strong across many markets and international portfolios, independent of typical return predictability drivers. However, its ability to capture stock momentum profits depends on methodological and dataset choices. Empirical factor momentum cannot entirely subsume stock or industry momentum globally. Conversely, price momentum often better explains its factor counterpart than vice versa. Notably, factor momentum based on principal components is more robust, capturing a major share of price momentum gains in developed and emerging markets. Our findings challenge the view that momentum merely times other factors rather than constituting a distinct anomaly.

Momentum and individual investor trades: Evidence from Singapore

This paper examines the role of retail investor trading activity on stock price momentum. We find that there is little evidence of momentum for stocks traded on the Singapore Exchange (SGX) unconditionally and momentum is concentrated in stocks with high market capitalization and high nominal prices. While these stocks are likely to be the trading habitat of institutional investors, they exhibit substantially greater price momentum when they are accompanied by heavy trading by retail investors. Moreover, contrarian trading by retail investors on momentum stocks increases stock price underreaction to information and generates momentum of above 2% per month.

Stock price momentum modeling using social media data

Alternative data has rapidly gained popularity as a means of observing investor reactions to current stock market events, analyzing sector movements, and developing investment strategies. Signals observed from alternative data may add valuable information to conventional market analysis, especially when there exists some information asymmetry in the market, to which small-cap stocks are particularly sensitive. Our research uses alternative textual data obtained from social media to predict the price momentum of small-cap stocks, which are known to be sensitive to market events and retail investors’ reactions. We directly address the challenges in the analysis of texts, especially in the Korean language, such as the use of jargon, acronyms, and typos, by taking a two-fold approach to preprocessing. Then, we extract the social keywords and label them by two standards: word momentum and correlation with stock price movement. Using these social keywords as social indicators derived from the retail investors trading small-cap stocks, in addition to the conventional technical indicators, we propose a price momentum forecast model which classifies whether the closing price of a given small-cap stock will increase by more than 10% in the next 5 business days. Experimental results show that our approach successfully extracts social keywords that play a significant role in determining the price momentum in the market, and our selected social indicators are intuitive to human understanding. Furthermore, we consider example investment scenarios and run tests by training various classifiers with the social indicators and computing cumulative returns. Our results are very promising and show that the investment scenarios with social indicators outperform the benchmark considerably. We anticipate that our work will expand the scope of using alternative data for stock market analysis and price momentum forecasts by incorporating social indicators extracted from social media.

CEO incentive compensation and stock price momentum

AbstractWe document strong evidence that CEO incentive compensation can predict the significance of stock price momentum through discretionary accrual and real activities manipulation. The profit of momentum strategy increases with CEO pay‐for‐performance incentive, but decreases with CEO risk‐taking incentive. It also evaluates the effects of information uncertainty on such relationship. The evidence is more significant for firms with older and longer tenured CEOs and firms with more informed traders. The relationship between the profit of momentum strategy and CEO pay‐for‐performance incentive is stronger among CEOs without the risk‐taking incentive. Our results are robust for different sub‐samples based on before and after Reg FD and Sarbanes–Oxley Act, even after controlling for the potential endogeneity. Further, our findings are consistent with the information diffusion explanation of momentum and the agency theory that incentivised CEOs tend to manipulate information by smoothing good news, concealing mildly bad news and accelerating the disclosure of extremely bad news.

Comomentum: Inferring Arbitrage Activity from Return Correlations

Abstract We propose a novel measure of arbitrage activity to examine whether arbitrageurs can have a destabilizing effect on the stock market. We focus on stock price momentum, a classic example of a positive-feedback strategy that our theory predicts can be destabilizing. Our measure, dubbed comomentum, is the high-frequency abnormal return correlation among stocks on which a typical momentum strategy would speculate. When comomentum is low, momentum strategies are stabilizing, reflecting an underreaction phenomenon that arbitrageurs correct. When comomentum is high, the returns on momentum stocks strongly revert, reflecting prior overreaction from crowded momentum trading that pushes prices away from fundamentals. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

The Impact of ESG Risk on Stocks

This article examines the impact of environmental, social, and governance (ESG) risk on US stocks through the lens of Sustainalytics’ ESG risk-rating measure over the past decade. The author finds that stocks with low ESG risk ratings (green stocks) not only have higher realized returns but also provide better tail-risk protection than stocks with high ESG risk ratings (brown stocks), especially during the COVID-19 crisis. The tail-risk protection provided by green stocks is robust within sectors and styles. Green funds and exchange-traded funds (ETFs) that hold green stocks have attracted significantly more fund flow than their counterparts, which is associated with the outperformance for both green funds and stocks. <b>TOPICS:</b>ESG investing, exchange-traded funds and applications, tail risks, information providers/credit ratings <b>Key Findings</b> ▪ The impact of ESG risk on US stocks is examined through the lens of Sustainalytics’ ESG risk-rating measure from September 2009–November 2020. Green stocks with lower ESG risk ratings outperform brown stocks with higher ESG risk ratings significantly. More important, green stocks provide better tail-risk protection than brown stocks. ▪ The energy sector accounts for the main part of the underperformance for brown stocks. When excluding stocks in the energy sector, the outperformance of green stocks shrinks. However, green stocks still provide meaningful tail-risk protection. ▪ Finally, recent evidence shows that green funds and ETFs that hold green stocks have attracted significantly more fund flows than their counterparts, which is associated with the outperformance of both green funds (including ETFs) and green stocks, as fund flow can drive persistent fund performance and stock price momentum.

Factor momentum, option-implied volatility scaling, and investor sentiment

Factor momentum produces robust average returns that exhibit a similar economic magnitude as stock price momentum. To the extent that the post-earnings announcement drift (PEAD) factor captures mispricing, winner factors earn profits from being long on underpriced stocks and short on overpriced stocks. Conversely, loser-factors’ negative exposure to the PEAD factor suggests that loser factors capture mispricing by being long on overpriced stocks and short on underpriced stocks. Option-implied volatility scaling increases both the economic magnitude and statistical significance of factor momentum. Factor momentum is not exposed to the same crashes as stock price momentum and therefore could provide a hedge for stock price momentum crash risks. Also, factor momentum mispricing is more pronounced when investor sentiment is high.

Decoupling stock price momentum from accounting fundamentals

PurposeWhat explains patterns in stock prices is an important question. One such pattern, price momentum, is a well-known capital markets anomaly where recent stock price performance appears to continue into the future. This momentum is frequently thought to reflect delayed reaction by investors to unspecified information (i.e. underreaction). This study aims to provide a useful insight regarding momentum: potential mispricing related to accounting fundamentals appears to conceal longer-term reversals in price momentum. Controlling for these fundamentals reveals that price momentum reverses, indicating that investor overreaction is a potentially important source of stock price momentum. The evidence presented in this study emphasizes the importance of decoupling momentum and accounting fundamentals to achieve a more complete understanding of what explains stock price momentum.Design/methodology/approachThis study explores this question by examining the longer-term performance of momentum stocks in the US market after decoupling it from performance related to accounting fundamentals using returns to fundamentals-based factors as controls in time series regressions.FindingsThis study finds evidence of clear reversals in the remaining price momentum. These reversals provide a new insight into the momentum effect because they imply that the component of price momentum not traceable to accounting fundamentals reflects investor overreaction rather than underreaction.Originality/valueThe findings indicate that the underlying nature of the information driving price movements is important to achieving a complete understanding of what explains price momentum. To the best of the author’s knowledge, no other study has examined the behavior of stock price momentum while controlling for accounting fundamentals.

Factor Momentum, Investor Sentiment, and Option-Implied Volatility-Scaling

Factor momentum produces robust average returns that exhibit a similar economic magnitude as documented for stock price momentum. To the extent that the PEAD factor captures mispricing, winner factors profit from being long on underpriced stocks and short on overpriced stocks. Oppositely, loser factors’ negative exposure to the PEAD factor suggests that loser factors capture mispricing by being long on overpriced stocks and short on underpriced stocks. Option-implied volatility scaling increases both the economic magnitude and statistical significance of factor momentum. Factor momentum is not exposed to the same crashes as stock price momentum and could therefore serve as a hedge for stock price momentum crash risks.

A comparison of investors’ and analysts’ efficiency in incorporating accounting information

ABSTRACT In this study, we compare the relative efficiency of investors and sell-side analysts in using various accounting information to predict future earnings. Our results indicate that the equity- value estimates inferred from the analysts’ earnings forecasts are more biased than the stock prices in interpreting stock price momentum, accruals, and the growth in long-term net operating assets. Therefore, we conclude that sell-side analysts are generally less efficient than investors in incorporating certain accounting information. Thus, investors may not be able to mitigate their mispricing of certain accounting information by fixating on analysts’ earnings forecasts as a benchmark for their earnings expectation.

Dissecting stock price momentum using financial statement analysis

AbstractThe literature on stock price momentum documents that past price performance predicts future price performance (over the next 3–12 months). We argue that past price performance can be driven either by fundamentals or by non‐fundamental reasons and financial statement analysis (FSA) can help distinguish between these drivers of past returns. We find that price momentum reverses where fundamentals are inconsistent with past price performance, allowing us to develop an investment strategy that outperforms a pure momentum strategy over 80 percent of the time. Overall, we document robust evidence on the usefulness of FSA for enhancing momentum strategies.

Persistence of Earnings Components and Price Momentum

This study investigates whether the performance of stock price momentum is affected by factors associated with the persistence of earnings components. We find that stocks with high accruals (or low cash flows) generate higher momentum payoffs than low accruals (or high cash flows) stocks, and the additional momentum payoffs are mostly attributable to abnormal accruals and net distributions to equity. While our results primarily support the earnings fixation explanation, a momentum trading strategy based on the growth in net operating assets generates comparable profits. Lastly, the performance of our trading strategy based on a combination of price momentum and earnings components cannot be explained by limits to arbitrage or standard risk adjustments.

The Effect of Oil Price Changes on Stock Price Momentum

We document a novel stock price momentum effect related to oil. A portfolio that buys low-oil-beta stocks and sells high-oil-beta stocks earns abnormal returns of -1.08% per month from 1986 to 2011, with majority of abnormal returns arising from 2002 to 2011, and 1.58% per month from 2012 to 2015. Our results are robust after controlling for size, value, asset growth, profitability, momentum, and total volatility in two-dimensional sorting, and after removing the oil price fluctuations that are driven by aggregate demand shocks. Oil beta is insignificant in forecasting future returns before 2002 in cross-sectional regressions and becomes significant since 2002. Our findings are consistent with the notion that investors underestimate the magnitude of the boom and bust of oil prices.

Macroeconomic risk and seasonality in momentum profits

We contribute to the growing debate on the relation between macroeconomic risk and stock price momentum. Not only is momentum seasonal, so is its net factor exposure. We show that winners and losers only differ in macroeconomic factor loadings in January, the one month when losers overwhelmingly outperform winners. In the remainder of the year, when momentum does exist, winner and loser factor loadings offset nearly completely. Furthermore, the magnitude of macroeconomic risk premia appears to seasonally vary contra momentum. In contrast, the relatively new profitability factor does a much better job of capturing the described seasonality.

Institutional Investment Constraints and Stock Prices

We test the hypothesis that investment constraints in delegated portfolio management may distort demand for stocks, leading to price underreaction to news and stock return predictability. We find that institutions tend not to buy more of a stock with good news that they already overweight; they are reluctant to sell a stock with bad news that they already underweight. Stocks with good news overweighted by institutions subsequently significantly outperform stocks with bad news underweighted by institutions. The impact of institutional investment constraints sheds new light on asset pricing anomalies such as stock price momentum and post–earnings announcement drift.

Growth options, dividend payout ratios and stock returns

Purpose This paper aims to examine the impact of the dividend payout ratio on future stock returns and momentum strategies. Design/methodology/approach The author uses the portfolio sorting approach used in the momentum literature to examine this impact. Findings First, the author shows that the returns for the winner stocks tend to be the largest if no dividends are paid and then decrease with the dividend payout ratio; the returns for the loser stocks tend to have an inverted U-shaped relationship with the dividend payout ratio, but the zero-dividend loser stocks have the smallest return; and the returns for the stocks between the winners and the losers tend to remain similar, regardless of the dividend payout ratio. Second, the author shows that momentum profit is the largest for the stocks that do not make dividend payment but appear similar for the stocks that pay dividends. The author's empirical findings imply that stock price momentum is a function of the dividend payout ratio, growth stock momentum tends to be much stronger than value stock momentum and no-dividend stock momentum beats dividend stock momentum. In fact, when the dividend payout ratio is considered, momentum profit can be improved by up to 63 per cent. Originality/value This paper is the first one to examine the impact of dividend payout ratios on future stock returns and momentum profit, and it obtained many interesting empirical results. In addition, unlike most studies in the momentum literature that use behavioral theory to explain empirical findings, this paper uses the growth option idea to present a rational explanation for the empirical results in this paper.

Analyst Optimism and Stock Price Momentum

We examine the effect of security analyst recommendations on stock price momentum. Results show that momentum profits are directly linked to analyst optimism. Specifically, we find that a 1-unit change in recommendation quintile translates to about a 50 basis point change in subsequent 3-month momentum profits. We also examine uncovered stocks by using parallel projection methods to project analyst recommendations from covered stocks onto uncovered stocks. For uncovered stocks, projected recommendations are unrelated to subsequent momentum profits. Our findings show that investor optimism alone does not generate stock price momentum. Analyst affirmation is a key catalyst for stock price momentum.

Momentum Trading on the Johannesburg Stock Exchange after the Global Financial Crisis

The aim of this paper is to discuss the presence of stock price momentum post the 2008 credit crisis and explore its implications for market participants in South Africa. This study investigates whether momentum was evident on the JSE from 2009 to 2014. Using different indicators of momentum, this paper simulates the possible investment choices using these indicators.

Firm Expansion and Stock Price Momentum*

We document a significant and robust connection between firm-level asset changes and return momentum. Momentum profits are large and significant for firms that have experienced large asset expansions or contractions, whereas they otherwise are small and often insignificant. The interaction pattern is not subsumed by previously documented drivers of momentum and shows up in market states where prior literature has documented an absence of momentum profits. Furthermore, we find a positive time series relationship between aggregate asset growth (AG) and return momentum, and the effect of aggregate AG is stronger than that of variables related to business cycles and investor sentiment. While most existing models of firm investment and momentum cannot explain our results, recent real options models appear to hold the most promise.

A Flow-Based Explanation for Return Predictability

I propose and test a capital-flow-based explanation for some well-known empirical regularities concerning return predictability—the persistence of mutual fund performance, the “smart money” effect, and stock price momentum. First, I construct a measure of demand shocks to individual stocks by aggregating flow-induced trading across all mutual funds, and document a significant, temporary price impact of such uninformed trading. Next, given that mutual fund flows are highly predictable, I show that the expected part of flow-induced trading positively forecasts stock and mutual fund returns in the following year, which are then reversed in subsequent years. The main findings of the paper are that the flow-driven return effect can fully account for mutual fund performance persistence and the smart money effect, and can partially explain stock price momentum.