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.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.