Another Look at Industry Momentum and the Cross Section of Expected Returns
38 Pages Posted: 18 Feb 2015
Date Written: February 16, 2015
This paper investigates whether industry affiliation matters to implementing industry momentum strategies. After discriminating between relevant and redundant industries it shows that only a subset corresponding to less than 50% of the overall market capitalization generates significant momentum payoffs. Industry momentum is only priced in the cross section of expected returns when relevant industries are used as test assets. An out-of-sample experiment utilizing a new double-sorting approach is proposed. It incorporates a learning period to condition momentum strategies on relevant industries and offers evidence that the conditional momentum strategy generates up to 30% higher payoffs than the unconditional counterpart.
Keywords: Industry momentum, Industry affiliation, Industry momentum factor, Asset growth, Credit rating, Cross section of expected returns
JEL Classification: G12, G14
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