Article1997

The Interaction of Value and Momentum Strategies

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Reporting and Valuation Research

Abstract

Value and momentum strategies both have demonstrated power to predict the cross-section of stock returns, but are these strategies related? Measures of momentum and value are negatively correlated across stocks, yet each is positively related to the cross-section of average stock returns. We examine whether the marginal power of value or momentum differs depending upon the level of the other variable. Value strategies work, in general, but are strongest among low-momentum (loser) stocks and weakest among high-momentum (winner) stocks. The momentum strategy works, in general, but is particularly strong among low-value (expensive) stocks. These results hold despite finding comparable spreads in value measures among stocks with different levels of momentum and comparable spreads in the momentum measure among stocks with different levels of value. Any explanation for why value and momentum work must explain this interaction.

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References

1993Common risk factors in the returns on stocks and bonds 1992The Cross-Section of Expected Stock Returns 1993Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency 1994Contrarian Investment, Extrapolation, and Risk 1993Beta and Return

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