The Bottom-Up Beta of Momentum

A direct measure of the cyclicality of momentum at a given point in time, its bottom-up beta with respect to the market, forecasts both the returns and the risk of the strategy. Challenging a potential risk-based explanation, a highly cyclical momentum portfolio forecasts both higher risk and lower returns for the strategy. The results show robustness out-of-sample (OOS) and controlling for other variables. One predictive regression of monthly momentum returns on its bottom-up beta produces an OOS R-square of 2.41%. This contrasts with the usual negative OOS R-squares of similar predictive regressions for the market excess return.