The documented systematic return premium earned by buying recent winners and selling recent losers — one of the most persistent and globally observed factors in asset pricing.
Deeper Explanation
Formally documented by Jegadeesh and Titman (1993), the momentum factor generates significant returns across geographies, asset classes, and time periods. The most common implementation: buy stocks in the top decile of 12-month returns (excluding the last month), sell stocks in the bottom decile. The factor is particularly strong in mid and small caps, across international markets, and in commodities. The standard explanations: (1) information diffuses slowly, so strong fundamentals take time to be fully priced; (2) investors underreact to earnings surprises, creating predictable continuation; (3) institutional herding amplifies trends. The factor crashes sharply during sudden market reversals — momentum strategies need strict drawdown controls.
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Go deeper into the Momentum school — frameworks, case studies, and decision systems.