Last Updated on 10 February, 2024 by Rejaul Karim
The academic article “Alpha Momentum and Price Momentum” by Hannah Hühn and Hendrik Scholz delves into an innovative alpha momentum strategy focused on stock investment, leveraging three-factor alphas estimated through daily returns.
Offering empirical analysis for the U.S. and Europe, the study uncovers the remarkable predictive power of past alpha in shaping the cross-section of stock returns. Notably, the research underscores the less dynamic factor exposures exhibited by alpha momentum in contrast to price momentum, highlighting its ascendancy over price momentum specifically within the U.S. market.
Moreover, by establishing a behavioral link, the study distinguishes alpha momentum’s association with underreaction to firm-specific news, while price momentum is driven by price overshooting arising from momentum trading.
This insightful exploration not only enriches our understanding of investment strategies but also accentuates the distinctions between alpha and price momentum factors.
Abstract Of Paper
We analyze a novel alpha momentum strategy that invests in stocks based on three-factor alphas which we estimate using daily returns. The empirical analysis for the U.S. and for Europe shows that i) past alpha has power in predicting the cross-section of stock returns, ii) alpha momentum exhibits less dynamic factor exposures than price momentum and iii) alpha momentum dominates price momentum only in the U.S. Connecting both strategies to behavioral explanations, alpha momentum is more related to an underreaction to firm-specific news while price momentum is primarily driven by price overshooting due to momentum trading.
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University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg
In conclusion, “Alpha Momentum and Price Momentum” by Hannah Hühn and Hendrik Scholz offers a compelling exploration of the distinctive alpha momentum strategy and its juxtaposition with price momentum.
The research establishes the potency of past alpha in predicting stock returns, underscoring its pivotal role in shaping the investment landscape. Significantly, the study illuminates the less volatile factor exposures associated with alpha momentum in comparison to price momentum, affirming the dominance of alpha momentum over price momentum within the U.S. market.
Moreover, the behavioral linkage unveiled distinguishes alpha momentum’s association with underreaction to firm-specific news, while price momentum is driven by the momentum trading-induced price overshooting.
This distinctive analysis not only enriches our comprehension of alpha and price momentum strategies but also underscores their differential behavioral underpinnings in shaping stock returns.
What is the main focus of the academic article “Alpha Momentum and Price Momentum” by Hannah Hühn and Hendrik Scholz?
The main focus of the academic article is on an innovative investment strategy known as alpha momentum. The strategy is based on three-factor alphas estimated through daily returns. The study explores the predictive power of past alpha in shaping the cross-section of stock returns and compares alpha momentum with the more widely known price momentum strategy. The authors conduct empirical analyses for the U.S. and Europe, examining the dynamics of alpha momentum, its factor exposures, and its behavioral underpinnings.
What does the study reveal about the predictive power of past alpha in stock returns?
The study reveals that past alpha has significant predictive power in shaping the cross-section of stock returns. By analyzing three-factor alphas estimated from daily returns, the authors find that the historical performance of alpha plays a crucial role in forecasting future stock returns. This underscores the importance of considering alpha, derived from various factors, in designing investment strategies.
How does alpha momentum compare to price momentum, and what distinctions are highlighted in the study?
The study compares alpha momentum with price momentum, and it highlights several distinctions. Alpha momentum is found to exhibit less dynamic factor exposures compared to price momentum. Notably, alpha momentum dominates price momentum specifically within the U.S. market. The research sheds light on the differences in factor exposures and performance characteristics between these two momentum strategies, providing valuable insights for investors.