Momentum describes the tendency of stocks with strong recent returns to continue outperforming stocks with weak recent returns over intermediate horizons. Jegadeesh and Titman (1993) studied NYSE and AMEX stocks using the CRSP daily returns file from January 1965 to December 1989. Buying past winners and selling past losers generated a compounded excess return of 12.01% per year on average. The 6-month/6-month strategy realized a cumulative return of 9.5% over the 12 months following portfolio formation. Profits were not explained by systematic risk or delayed reactions to common factors.
What the Study Found
The 12-month formation, 3-month holding strategy (with a 1-week lag) was the top performer at 1.49% per month. The 6-month formation period produced returns of about 1% per month regardless of the holding period. Past winners exceeded past losers in 67% of all months, rising to 71% when January is excluded. The average non-January monthly return was 1.66%. After accounting for 0.5% one-way transaction costs, the risk-adjusted return remained 9.29% per year.
Methodology
Jegadeesh and Titman used the CRSP daily returns file covering NYSE and AMEX stocks. The study covered January 1965 to December 1989. Stocks were ranked each month into decile portfolios by J-month lagged returns and held for K months. The study tested 32 strategies, with J and K each ranging from 3 to 12 months. Controls included beta, firm size, lead-lag factor effects, and transaction costs.
Key Statistics
| Metric | Finding | Context |
|---|---|---|
| Compounded excess return (6-month/6-month strategy) | 12.01% per year | 1965–1989 sample period |
| Top strategy monthly return | 1.49% per month | 12-month formation, 3-month holding, 1-week lag (Panel B) |
| Cumulative return at month 12 | 9.5% | 6-month formation portfolio in event time |
| Cumulative return at month 36 | about 4% | Returns declined from 9.5% peak |
| Non-January monthly return | 1.66% | Average across all non-January months |
| January average return | about −7% | Relative strength strategy loses in January |
| Risk-adjusted return after costs | 9.29% per year | After 0.5% one-way transaction cost |
| Semiannual portfolio turnover | 84.8% | Average for the relative strength trading rule |
| Zero-cost portfolio beta | −0.08 | 6-month/6-month winners minus losers portfolio |
| Announcement-date return edge | over 0.7% | Winners exceed losers in first 6 months around earnings dates |
| One-factor model | r_it = μ_i + b_i·f_t + e_it | Decomposes returns into expected, factor, and idiosyncratic components |
| WRSS profit decomposition | E{(r_it − r̄_t)(r_it−1 − r̄_t−1)} = σ_μ² + σ_b²·Cov(f_t, f_t−1) + Cov_i(e_it, e_it−1) | Three sources of relative strength profit |
Why This Matters
Momentum profits survive after controlling for systematic risk, firm size, and transaction costs. The earnings announcement evidence links momentum to market underreaction to firm-specific information. About half of the 12-month return dissipates within the following 2 years. Whether this reflects temporary price pressure or persistent mispricing remains an open question in the literature. The strategy fails in January, suggesting tax-loss selling plays a role in the reversal.