Systematic Momentum

This paper provides evidence that momentum is a systematic phenomenon. We first show that there is essentially no diversification effect in the volatility of momentum profits when momentum strategies are applied to increasingly larger samples of stocks. Further, using the frequency domain component method to decompose stock returns, we find that stocks’ response to a few dynamic systematic factors can explain both the level and the variability of momentum profits. The results are robust to variations in momentum strategies and estimation procedures. Our finding supports a rational explanation of the momentum effect. We also examine the relationship between the estimated dynamic factors and several observable economic factors. JEL Classification: G12