Momentum factor of cumulative return over the past K months
factor.formula
MOM(K) = ∑_{t=1}^{K} r_{t}
in:
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Cumulative return momentum factor for the past K months
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The lookback period for momentum calculation, in months. For example, K=6 means calculating the cumulative returns of the past 6 months.
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The monthly return in the tth month is equal to the closing price at the end of the month divided by the closing price at the beginning of the month minus 1, that is, (P_end - P_begin) / P_begin.
factor.explanation
The momentum factor is designed to capture the inertial trend of stock prices. Specifically, if a stock has accumulated a relatively high positive return rate in the past K months, it is considered to have a strong upward momentum and may continue to rise in the future. Conversely, if a stock has accumulated a relatively high negative return rate in the past K months, it is considered to have a strong downward momentum and may continue to fall in the future. This factor can be used as an important component of a stock selection strategy in conjunction with other factors to improve the return and risk-adjusted performance of the portfolio. It should be noted that the momentum effect is not effective in all market environments and there may be a reversal risk. Therefore, when using this factor, it is necessary to consider the market situation and risk preference comprehensively.
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factor_risk.content
factor.references
factor.references_description
- Jegadeesh, Narasimhan, and Sheridan Titman. (1993). Returns to buying winners and selling losers: Implications for stock market efficiency. Journal of Finance 48, 65-91