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

Abstract

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.