Momentum
Also known as: Momentum effect, Relative-strength effect
Recent winners keep winning and recent losers keep losing, longer than they should.
What it means
The well-documented market anomaly that securities which have performed well over the past several months tend to continue outperforming, and recent losers continue to lag, over horizons of three to twelve months. It violates the weak form of market efficiency and is hard to reconcile with rational risk pricing because the effect is so persistent and pervasive across asset classes. Behavioral accounts attribute it to under-reaction to news followed by delayed over-reaction, herding, and the disposition effect, which slows the incorporation of information into prices. It matters as one of the most robust challenges to efficient markets and a cornerstone of quantitative investing.
Examples
A stock that has climbed steadily for the past six months tends, on average, to keep climbing over the next few — a pattern arbitrage has not erased.
A company posts a surprisingly strong quarter and the share price jumps, but not far enough; over the following months it drifts steadily higher as the market digests the news.
The pattern is not confined to shares: currencies and commodities that have trended for months tend to keep trending, which is why trend-following funds trade dozens of markets at once.
First described in Jegadeesh & Titman (1993).
Where this comes up
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