Is Factor Momentum More than Stock Momentum?

TL;DR

This paper examines the relationship between factor momentum and stock momentum, finding that factor momentum is only significant at short lags and is largely explained by stock momentum, supported by empirical tests and a theoretical model.

Contribution

It provides a comprehensive empirical analysis of factor versus stock momentum and introduces a theoretical model explaining their interaction across different time horizons.

Findings

Factor momentum exists and is significant at short lags.

Controlling for stock momentum reduces the significance of factor momentum.

Stock and factor momentum are correlated at all horizons.

Abstract

Yes, but only at short lags. In this paper we investigate the relationship between factor momentum and stock momentum. Using a sample of 72 factors documented in the literature, we first replicate earlier findings that factor momentum exists and works both directionally and cross-sectionally. We then ask if factor momentum is spanned by stock momentum. A simple spanning test reveals that after controlling for stock momentum and factor exposure, statistically significant Sharpe ratios only belong to implementations which include the last month of returns. We conclude this study with a simple theoretical model that captures these forces: (1) there is stock-level mean reversion at short lags and momentum at longer lags, (2) there is stock and factor momentum at all lags and (3) there is natural comovement between the PNLs of stock and factor momentums at all horizons.