Short-Term Momentum in Equity Factors

Does Short-Term Performance Chasing Work?

September 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Short-term momentum persists in common equity factors
  • The persistence is strong in Value and Dividend Yield
  • However, these results conflict with short-term mean-reversion on equity index level


When Trump won the US presidential election in November 2016, small and cheap stocks started rallying, which surprised most investors as the consensus was a risk-off positioning. As new trends emerge, a frequent question is if these trends will sustain. Momentum, which is a trend following strategy, works when measured over longer time periods, but some investors might be more intrigued by chasing performance on a shorter time frame. In this short research note, we will evaluate short-term momentum in common equity factors across markets (read Momentum Variations).


We focus on a universe of seven factors namely Value, Size, Momentum, Low Volatility, Quality, Growth and Dividend Yield in the US, European, UK and Japanese stock markets. The factor performance is calculated by constructing long-short beta-neutral portfolios of the top and bottom 10% of stocks ranked by the factor definitions, which are in line with academic and industry standards. Only stocks with a minimum market capitalisation of $1 billion are included. Portfolios are rebalanced monthly and each transaction incurs costs of 10 basis points.

Short-term momentum is defined as a time series momentum strategy, i.e. we buy the factor if last week’s performance was positive and short the factor if the performance was negative. A trade is entered each day and held for a week. The portfolio can therefore be theoretically 100% net long or short a factor. Transaction costs are ignored, which makes this analysis more interesting from a theoretical than practical perspective.


The chart below shows the performance of the short-term momentum strategy applied to common equity factors in the US. We can observe that most factors do not exhibit performance persistence, except for Value, Growth and Dividend Yield. Growth generated a lower return than Value or Dividend Yield, but has been highly consistent since 200