Overlapping momentum portfolios

Different momentum investors use different formation periods to evaluate past stock perfor-mance. We explore the consequences of this diversity by studying the stocks that are the likely constituents of the portfolios of the heterogeneous momentum investors that coexist in practice. We show that stocks in the intersection of the 6 and 12-month momentum portfolios - over-lappingmomentum stocks - display enhanced medium-term return momentum. This finding is robust to considering a broad set of risk factors, transaction costs, and alternative explanations. Focusing on overlapping momentum stocks improves the returns of several momentum-based strategies proposed in the literature. The results are in line with the concurrence of trades by heterogeneous momentum investors exacerbating return continuation.

Automated summary

Different momentum investors use different formation periods to evaluate past stock performance. We find that stocks in the intersection of the 6 and 12-month momentum portfolios display enhanced medium-term return momentum. This finding is robust and improves the returns of several momentum-based strategies proposed in the literature. The results suggest that the concurrence of trades by heterogeneous momentum investors exacerbates return continuation.