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Twin Momentum: Fundamental Trends Matter

Last Updated on 10 February, 2024 by Rejaul Karim

In the realm of stock market dynamics, our exploration into “Twin Momentum: Fundamental Trends Matter” uncovers a compelling narrative. Delving into trends in firm fundamentals, our study reveals a distinct fundamental momentum.

A strategic approach involving the purchase of stocks in the top quintile of fundamental trends and the sale of stocks in the bottom quintile yields a noteworthy monthly average return of 0.85%, akin to the returns garnered through conventional price momentum strategies. Intriguingly, the fusion of both price and fundamental momentum into a twin momentum strategy not only surpasses their individual contributions but also presents a challenge in explaining the enhanced returns solely through short-sell impediments.

This research reinforces the pivotal role of fundamental analysis alongside technical analysis, emphasizing that trends encapsulate incremental information that goes beyond commonly utilized lagged fundamental predictors.

Abstract Of Paper

Using trends in firm fundamentals, we find that there is a fundamental momentum in the stock market. Buying stocks in the top quintile of fundamental trends and selling stocks in the bottom earns a monthly average return of 0.85%, comparable to price momentum. Combining both price and fundamental momentum produces a twin momentum, which earns an average return that exceeds their sum and is difficult to explain by short-sell impediments. Our results not only support the view that fundamental analysis is as important as technical analysis, but also indicate that trends contain incremental information beyond often used lagged fundamental predictors.

Original paper – Download PDF

Here you can download the PDF and original paper of Twin Momentum: Fundamental Trends Matter.

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Author

Dashan Huang
Singapore Management University – Lee Kong Chian School of Business

Huacheng Zhang
University of Edinburgh Business School

Guofu Zhou
Washington University in St. Louis – John M. Olin Business School

Conclusion

In closing, the study brings to light the crucial role of fundamental trends in the stock market. The strategy of acquiring stocks from the top quintile of fundamental trends and divesting those from the bottom quintile yields a substantial monthly average return of 0.85%, akin to returns observed in traditional price momentum.

Intriguingly, the combination of both price and fundamental momentum, coined as “twin momentum,” outperforms the cumulative return of the individual factors. This phenomenon cannot be solely ascribed to short-sell impediments, emphasizing the comparable importance of fundamental analysis alongside technical analysis.

Furthermore, the findings highlight the informational value inherent in trends, indicating their provision of incremental insights beyond commonly used lagged fundamental predictors.

Related Reading:

Does Revenue Momentum Drive or Ride Earnings or Price Momentum?

A Smiling Bear in the Equity Options Market and the Cross-Section of Stock Returns

FAQ

Q1: What is the main focus of the research paper “Twin Momentum: Fundamental Trends Matter”?

The research explores the dynamics of stock market trends, specifically focusing on fundamental momentum. It investigates the strategy of buying stocks in the top quintile of fundamental trends and selling stocks in the bottom quintile. The study aims to understand the performance of this strategy in comparison to traditional price momentum strategies.

Q2: What are the key findings regarding the performance of the twin momentum strategy in the stock market?

The study reveals that implementing a twin momentum strategy, combining both price and fundamental momentum, produces an average return that surpasses the sum of their individual contributions. The strategy involves purchasing stocks with strong fundamental trends and divesting stocks with weak fundamental trends. The observed returns cannot be solely explained by short-sell impediments.

Q3: How does the research emphasize the role of fundamental analysis and trends in the stock market?

The findings reinforce the importance of fundamental analysis alongside technical analysis in stock market strategies. The study suggests that trends in firm fundamentals contain incremental information beyond commonly used lagged fundamental predictors. The strategy employed in the research underscores the significance of considering both price and fundamental momentum for enhanced returns in the stock market.

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