Factor Momentum in the U.S. and Norwegian Markets : An emprical study investigating momentum in factor returns using stock data of the U.S. and Norwegian markets
Master thesis
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https://hdl.handle.net/11250/3098151Utgivelsesdato
2023Metadata
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- Master Thesis [4505]
Sammendrag
Factors exhibit momentum as strong as that in individual stocks. Importantly, momentum in
factor returns has strong and robust predictive power for future performance of factors. This
thesis finds that the impact of factor momentum is economically and statistically significant in
both the U.S. and Norwegian markets. For example, the good (vs. bad) performance of the
factor in the previous year leads to an increase of about 87 basis points (bps) in returns for an
average factor in the Norwegian stock market. It is also found that factor momentum can
transmit into the cross-section of stock returns, leading to an important question: Does
momentum in factor returns relate to momentum in individual stock returns? This thesis aims
to shed light on this puzzling issue by addressing the following sub-research questions: ( 1) How
strong are factor momentum profits in different markets (i.e., U.S. and Norway)? (2) When and
where can factor momentum be observed? (3) To what extent can factor momentum explain
the cross-sectional momentum in individual stock returns? And (4) does factor momentum stem
from individual stock momentum? Using individual stock and various factor data in the U.S.
and Norwegian markets, this thesis provides strong evidence for substantial presence of factor
momentum and its nontrivial contribution to the cross-section of individual stock returns in
both markets. Furthermore, in the U.S. market, factor momentum is found to primarily
concentrate in a few of principal component (PC) factors with highest eigenvalues. The
momentum found in these factors appears to subsume individual stock momentum (e.g., in the
form of the up-minus-down factor), while the reverse is not true. Indeed, incidental momentum
in factor returns caused by individual stock momentum has poor performance in explaining the
factor momentum profits. Although factor momentum found in a smaller set of factors in the
Norwegian market is not sufficient to exhibit the same results, existing evidence from both
markets supports that momentum is not independent of other risk factors, and that momentum
in returns of other factors is sufficient to explain most of stock momentum profits. Future
research should further compare momentum in factor returns and momentum as an independent
factor in other assets and regions to validate the robustness of these findings.