Cracking the momentum puzzle: Fresh research on stock-specific signals
The article ‘The Many Facets of Stock Momentum: Distinguishing Factor and Stock Components’ by Quoniam Research analysts Dr Xavier Gérard, CFA and Dr Laura Jehl was accepted for publication in the Financial Analysts Journal and is now available on the Journal’s website. The authors examine the ongoing debate on whether stock momentum is driven purely by factor exposures or if there is a genuine stock-specific component. The paper offers new evidence that adds depth to one of the most widely discussed anomalies in finance.
Key takeaways
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Novel approach: The authors introduce a method for separating factor-driven and stock-specific momentum.
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Robust results: Evidence is consistent across the U.S., Europe, and Japan over three decades.
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Academic relevance: The research links Quoniam’s science-based investment philosophy with cutting-edge academic research.
Congratulations on your new publication. What is the paper about?
Xavier: The study isolates firm-specific momentum by examining returns around earnings announcements, showing that stock-specific signals are distinct from factor exposures. This approach addresses the long-standing “bad-model problem” in residual momentum studies by focusing on returns tied directly to firm-level information. The findings demonstrate that this stock-specific momentum persists, predicts returns, and does not reverse over time.
As background, stock momentum is exposed to both factor and stock-specific components, but the systematic risk of factor momentum is such that it tends to dominate the impact of stock-specific momentum on performance. This study introduces a new methodology to isolate stock-specific momentum from earnings news and shows that it is a strong and robust predictor of future returns, less susceptible to trend reversals.
What motivated you to write this paper?
Laura: The controversy around momentum’s origins motivated the search for clearer evidence. Recent research suggested that momentum effects could be fully explained by factor exposures, but we believed this picture was incomplete. By focusing on firm-specific information, our study adds nuance to the debate and shows that momentum is multifaceted rather than one-dimensional.
How does this research fit into Quoniam’s broader research approach?
Xavier: At Quoniam we follow a scientific approach to financial research. We aim to formulate sound, testable hypotheses and draw conclusions based on data with an eye on real-world applicability. We knew that extracting the specific component of stock momentum would be challenging, since the signal is dominated by systematic risk. Yet, we thought that some stock specific momentum could be isolated by focusing on earnings announcements, when a lot of firm-specific information is released.
Building on this idea, we were able to devise a measure free from factor momentum biases and showed that this stock specific momentum predicts returns globally. This is a good example of how rigorous academic methods can uncover robust investment signals that are relevant across markets.
What do you see as the practical implications for institutional investors?
Laura: The findings suggest that investors underreact to firm-specific news while overreacting to factor-driven momentum, which is prone to reversal or crowded trades. Embedded into a balanced multi-factor approach, our stock-specific momentum signal creates opportunities for systematic strategies to capture persistent alpha across markets. Our signal even works in Japan, where traditional momentum is known to fail. For institutional investors, the results highlight the value of combining academic insights with disciplined portfolio construction to build more resilient sources of return.
Conclusion
The study adds fresh perspective to a long-standing debate in asset pricing. By providing strong evidence of stock-specific momentum, it strengthens the academic foundation that underpins systematic investing and reflects Quoniam’s commitment to science-based innovation in asset management.
