Dragging Momentum out of the Crowd

Abstract

Crowding risk is a major concern in factor investing in general, and in momentum strategies in particular. This article contributes to the discussion on the implications of crowding risk in the stock market by focusing on the dynamic of momentum crowdedness and the subsequent alterations in the related risk premium. Understanding these implications is key for the design of more resilient momentum strategies. Our analysis shows that the five-factor risk profile of momentum and the structure of the related risk premium mutate with crowdedness regime switches. It suggests that actively managing this risk in momentum strategies leads to a material improvement of their risk-adjusted performance.