Since we’ve released our new book, Quantitative Momentum, we’ve received a handful of basic questions related to momentum–specifically as it relates to stock selection. To address them, we’re writing an article about how to measure momentum.
How to measure momentum as it relates to stock picking
At this point, the so-called “momentum effect” has occupied academic researchers for several decades. Researchers have found that, on average, stocks with strong recent performance relative to other stocks in the cross section of returns tend to outperform in the future (see Levy 1967 for an old example and JT 1993 for a newer version).The effect has been well-documented by numerous follow-on researchers and the theory of “why” momentum works has been extensively explored (although we still don’t completely understand why it works).
So if an investor wants to harness momentum and implement it in the real world, a common question arises:
What is the best way to measure momentumfor stock picking purposes?
The academic research response is tofocus on so-called,“12_2 momentum,” which measures the total return to a stock over the past twelve months, but ignores the previous month. (e.g., Ken French data) But why use 12_2 momentum? Why shouldn’t we use the 3-month momentum, or the 6-month momentum?
Why 12-months? And why drop the most recent month’s returns?
Let’s take these questions one at a time.
Lookback Window
As we show in our blog about intermediate-term momentum, a few perturbations of how far back in time we should look have already been tested by academics. The chart below is from Jegadeesh and Titman in 1993. They show that the best performing strategy ranks stocks on their past 12-months returns, and holds for 3 months (forming overlapping portfolios).
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.
Thus, 12-month momentum looks reasonable.
Why drop the most recentmonth?
Notice that we look at 12_2 momentum, not 12_1 momentum. But why skip the most recent month? The reason why relates to the short-term reversal effect associated with momentum.
There is an academic finding that short-term momentum actually has a reversal affect, whereby the previous winners (measured over the past month) do poorly the next month, while the previous losers (measured over the past month) do well the next month. We document the findings in this article about short-term return reversals.
Researchers often argue that this is due to microstructure issues.Thus, most academics ignore the previous month’s return (or week in the case of JT 1993) in the momentum calculation, and we also do this in order to eliminate this short-term reversal effect when implementing the strategy. It should be noted, however, that including the previousmonth’s returns has a marginalaffect on the performance of momentum.
For more insight on 12_2 momentum, we invite you to explore a more important factor in momentum investing — rebalance frequency — as shown in the table above, and in our post about portfolio construction and momentum funds.
We hope you have found our exploration of how to measure momentum to be useful.
Good luck!
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Important Disclosures
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are availablehere.Definitions of common statistics used in our analysis are availablehere(towards the bottom).
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FAQs
In terms of an equation, the momentum of an object is equal to the mass of the object times the velocity of the object. where m is the mass and v is the velocity. The equation illustrates that momentum is directly proportional to an object's mass and directly proportional to the object's velocity.
How can you measure momentum? ›
Step 1: List the mass and velocity of the object. Step 2: Convert any values into SI units (kg, m, s). Step 3: Multiply the mass and velocity of the object together to get the momentum of the object.
How do you measure total momentum? ›
Answer and Explanation:
To calculate the total momentum for two objects during a collision, add their individual momentums together. You can calculate momentum for each object by using the formula p=mv, where p is momentum, m is mass, and v is velocity.
How do I calculate momentum? ›
Momentum (P) is equal to mass (M) times velocity (v). But there are other ways to think about momentum! Force (F) is equal to the change in momentum (ΔP) over the change in time (Δt).
What is the answer to the formula for momentum? ›
p = m v . You can see from the equation that momentum is directly proportional to the object's mass (m) and velocity (v). Therefore, the greater an object's mass or the greater its velocity, the greater its momentum.
How is momentum quantified? ›
Momentum is measured in kilograms times meters per second (kg*m/s).
How to identify momentum? ›
Momentum is measured by continually taking price differences for a fixed time period. To create a 10 day period momentum line you would subtract the closing price from 10 days ago from the last closing price.
How do you test for momentum? ›
Some of the main tools to measure momentum are the moving average convergence divergence (MACD), stochastic oscillator, price rate of change (ROC), and the relative strength index (RSI).
How to calculate total moment? ›
If different forces act at different points then the total moment about any point P is the algebraic (i.e. including the signs) sum of each moment about P. R = F1 + F2 .
How to find final momentum? ›
If you know an object's initial momentum and the force applied to it over a certain period of time, you can calculate its final momentum using the formula: Final Momentum = Initial Momentum + (Force x Time) Then, you can calculate the final velocity by dividing the final momentum by the object's mass: Final Velocity = ...
Explanation: Momentum gives the relationship between mass, velocity, and direction of an object. Any change in momentum results in force. So, a change in momentum is used to determine the force acting upon the object.
What is an example of momentum? ›
For example, a heavy truck traveling on the highway has more momentum than a smaller car traveling at the same speed because it has a greater mass. Having more momentum also makes it harder for the truck to stop. An object's momentum can also change as its motion changes.
How to solve a momentum problem? ›
Step 1: Determine the known values for the mass and velocity of the objects in the system. Step 2: Determine what unknown we are trying to find. Step 3: Re-arrange the conservation of momentum equation, as necessary, to solve for the unknown value. Step 4: Calculate the desired value.
What is the formula for the momentum? ›
The product of the units of mass and velocity is the unit of Momentum. To find the momentum, we can use the simple formula: P=mv, where P is the momentum.
What is momentum measured in? ›
In the International System of Units (SI), the unit of measurement of momentum is the kilogram metre per second (kg⋅m/s), which is dimensionally equivalent to the newton-second.
What is momentum answers? ›
Momentum is the quantity that is used to describe the state of motion of an object with a non-zero mass. Hence, momentum is applicable to any moving object. If is the mass of an object and is the velocity with which this body travels, then momentum can be expressed as p → = m v → .
What device measures momentum? ›
A ballistic pendulum is a device for measuring a bullet's momentum, from which it is possible to calculate the velocity and kinetic energy.
What is the measure of momentum of an object? ›
Momentum is the measurement of motion. Any moving object will have momentum. According to physics, the object's momentum equals mass times velocity.
How do you measure the momentum of a moving body? ›
The momentum of a body is defined as the product of its mass and velocity. It is a vector quantity and has a direction the same as the direction of velocity. A moving body will have a constant momentum if and only if the direction of motion stays constant and the product of (mass x velocity) stays constant.
