Broad-Market Return Persistence & Momentum Profits

Momentum profits are shown to be driven by the broad-market persistence of returns between the formation period and the holding period, which is measured as the slope coefficient of the regression of the cross-section returns in the holding period on the cross-section returns in the formation period. Broad-market persistence offers an understanding on momentum profits from a market-wide perspective that goes beyond the stock-specific continuation of extreme winners and losers as proposed in Jegadeesh and Titman (1993) and Grundy and Martin (2001). The proposed framework provides an alternative explanation to the inability of widely accepted asset pricing models in explaining momentum ptofits.