Momentum
The tendency of assets that have performed well (poorly) to continue performing well (poorly) over the next period.
Definition
Momentum is the empirical fact that past winners tend to keep winning and past losers tend to keep losing over formation periods from about 1 month to 12 months. Can be time-series (single asset) or cross-sectional (rank assets).
Why it matters
- One of the best-documented “factors” in equities and other asset classes.
- Underlies trend following and many tactical allocation strategies.
Common mistakes
- Overfitting formation and holding period (e.g. 7m/2m).
- Ignoring transaction costs (momentum can have high turnover).
- Chasing in illiquid names (implementation drag).
Notation
Time-series: ( r_{t-12,t} ) (12m past return). Cross-sectional: rank by ( r_{t-12,t} ), long top, short bottom.