Impact of Lookback Period on Momentum Factor

What is the optimal lookback period?

November 2025. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Momentum can be measured over various lookback periods
  • The optimal lookback remains between six and 12 months
  • Likely explained by human behavior

INTRODUCTION

Most fund managers are skeptical of the momentum factor because selecting stocks based on it requires little expertise – a spreadsheet and basic math often suffice. As a result, charging high fees for fund pursuing a momentum-based portfolio is challenging.

Yet, the substantial body of research demonstrating attractive excess returns from momentum cannot be ignored. One way to add value is by creating a more sophisticated version of the factor, for example, by measuring momentum through Sharpe ratios, alpha, or a combination of multiple metrics (read Momentum Variations and Improving the Momentum Factor).

Another approach is to adjust the standard 12-month lookback period. Winners could be held longer, or shorter lookbacks could be used, reflecting lower transaction costs and the market’s increasing short-term focus.

In this article, we will examine how the momentum factor’s performance depends on the choice of lookback period.

LOOKBACK SENSITIVITY OF THE MOMENTUM FACTOR

We focus on the U.S. stock market, defining the investable universe as all stocks with market capitalizations above $1 billion. For the long-short portfolio, we select the top 10% of best-performing and bottom 10% of worst-performing stocks, constructing it beta-neutral. For the long-only portfolio, we include only the top-performing stocks and calculate excess returns by subtracting the market return. Stocks are equally weighted and rebalanced monthly, accounting for transaction costs of 10 basis points.

Traditionally, momentum is measured as total return over the past 12 months, excluding the most recent month. In this study, we ignore that exclusion to evaluate very short lookbacks, noting that there is little difference between the standard 12-month measure and the exclusion-adjusted versio