Enhancing Momentum with Multi-lookback Winners/Losers

Do stocks that are winners or losers over multiple lookback intervals generate stronger future returns because they attract wider audiences of momentum investors? In their June 2022 paper entitled “Overlapping Momentum Portfolios”, Iván Blanco, Miguel De Jesus and Alvaro Remesal explore this question by comparing performances of three portfolios:

1. MOM (benchmark): long (short) the value-weighted tenth, or decile, of stocks with the highest (lowest) returns from 12 months ago to one month ago.
2. OMOM (overlapping): long (short) the value-weighted stocks in the MOM highest-return (lowest-return) decile that are also in the top (bottom) decile of stocks sorted by returns from six months ago to one month ago.
3. Non-OMOM (non-overlapping): long (short) the value-weighted stocks in the MOM highest-return (lowest-return) decile that are not also in the top (bottom) decile of stocks sorted by return from six months ago to one month ago.

They test portfolio holding intervals ranging from one month to 24 months. They consider such portfolio performance metrics (often annualized) as average monthly return, Sharpe ratio and 1-factor (market), 3-factor (plus size and book-to-market) and 5-factor (plus profitability and investment) alphas. Using monthly returns for a broad sample of U.S. stocks priced over $5 during December 1926 through December 2018, they find that: (more…)