Discussion of “Momentum and Autocorrelation in Stock Returns”

Jegadeesh and Titman (1993) document individual stock momentum: strategies that buy stocks that have performed relatively well in the past and sell stocks that have performed relatively poorly in the past generate significant positive returns over the 3to 12-month horizon. This finding, obtained using data from the U.S. market, also holds for a number of international markets [e.g., Haugen and Baker (1996), Rouwenhorst (1998)]. What are the economic mechanisms behind individual stock momentum? One approach to answering this question is to relate momentum to other factors driving the cross section of expected stock returns. A number of findings have emerged. Adjustments for factors such as the Fama and French three-factor model tend to strengthen, rather than explain, momentum [e.g., Fama and French (1996), Grundy and Martin (2001)]. Contrary to the finding of Conrad and Kaul (1998), cross-sectional differences in expected returns is not an important cause of momentum [e.g., Jegadeesh and Titman (1993), Grundy and Martin (2001)]. And contrary to the finding of Moskowitz and Grinblatt (1999), a number of subsequent articles find that industries (or industry effects) do not explain momentum [e.g., Asness, Porter, and Stevens (2000), Lee and Swaminathan (2000), Grundy and Martin (2001)]. Stock price momentum is partially related to earnings momentum, but both past returns and public earnings surprises (in a multiple regression) help to predict subsequent returns at horizons of six months to a year [e.g., Chan, Jegadeesh, and Lakonishok (1996)].