Quantitative Momentum

CHAPTER 4Why All Value Investors Need Momentum

“[Momentum] happens around the world, except Japan.”

—Eugene Fama, 2008 American Finance Association Interview¹

“We find that momentum in Japan is actually a success.”

—Cliff Asness, 2011 Journal of Portfolio Management²

Despite its simplicity, as a stand-alone investment strategy generic momentum works well, but some might say it does not work everywhere. One example of a “failure” of momentum is in Japanese equities…more on this in a moment. But the broad consensus from academic researchers, who are arguably biased in favor of findings that support the efficient market hypothesis (EMH), is that the evidence supports the notion that momentum-based stock picking strategies have beaten the market, even after controlling for risk. In short, there is something special about momentum. Even Eugene Fama, famous for his incredible empirical work on efficient markets, suggested that momentum is the biggest embarrassment to the efficient market theory, or in his own words, momentum is the “premier anomaly.”³

MOMENTUM IS A MYTH

Nonetheless, the myth that momentum is “not real” continues to be widely disseminated. For example, in a classic 2008 interview at the American Finance Association, Richard Roll, a premier financial economist in his own right, interviewed Eugene Fama, the king of financial economists. Roll and Fama had a spirited discussion on the so-called value premium, which ended in a stalemate over whether the extra return associated ...