Momentum Strategies

Source: Chan, Jegadeesh & Lakonishok (1996) · The Journal of Finance · DOI: 10.1111/j.1540-6261.1996.tb05222.x

TL;DR

Past returns and past earnings surprises each independently predict future return drift, and neither subsumes the other. Market, size, and book-to-market don't explain the drifts, and high-momentum stocks do not subsequently reverse — pointing to gradual underreaction to information. The strongest signal (a six-month return sort) shows a top-minus-bottom decile drift of ~1.74% per month, and analysts' forecasts respond sluggishly to past news, especially for past losers.

What anomaly it documents

Predictor: prior 6–12 month returns and prior earnings surprise (SUE / analyst revisions).

Direction: positive — past winners and positive-surprise firms keep outperforming.

Shape: ~1.74%/mo top-minus-bottom for the strongest sort; additive across price and earnings momentum; no short-horizon reversal.

OSAP predictors: momentum (Mom6m/Mom12m) and earnings-surprise signals.

How to construct it

Sorting variable: past return, standardized unexpected earnings (SUE), and analyst forecast revisions.

Universe: NYSE/AMEX/Nasdaq stocks (1977–1993).

Portfolio formation: independent sorts on each momentum measure.

Long / short: long high-momentum / positive-surprise, short low.

Weighting: equal-weighted deciles.

Rebalancing: monthly, 6-month holding.

Evidence and replication

Period	Notes	Source
1977–1993	price & earnings momentum both significant and additive; best sort ~1.74%/mo	this paper
OOS (post-1996)	momentum and PEAD persist; episodic crashes	post-publication
OSAP	momentum + earnings-surprise predictors positive	Chen & Zimmermann 2022

Why it might work

Underreaction: investors and analysts respond sluggishly to news, so prices adjust gradually.

Separate channels: price and earnings momentum carry partly distinct information.

Limitations and risks

Momentum crashes: severe, infrequent drawdowns at rebounds.

High turnover: monthly rebalancing is costly net of frictions.

Crowding: heavily exploited since publication.

Key references

Chan, L. K. C., Jegadeesh, N. & Lakonishok, J. (1996) — Momentum Strategies — Journal of Finance — DOI: 10.1111/j.1540-6261.1996.tb05222.x

Jegadeesh, N. & Titman, S. (1993) — Returns to Buying Winners and Selling Losers — JF

Provenance: verified/generated from the paper's full text.