Decomposing momentum: The forgotten component

Abstract

We split up the standard momentum return over months $t-12$ to $t-2$ at the highest stock price within this formation period. Of the overall momentum profits in month $t$, 84% can be attributed to the return prior to this peak price although research has exclusively focused on the post-peak return so far. The return predictability of the forgotten component is consistent with investor underreaction as underlying mechanism. Contrary to standard momentum strategies, the corresponding long-short returns are positively skewed, avoid momentum crashes, show no market state dependence, and yield consistent return premiums in both the US and international stock markets.