August 22, 2018
A new paper by four U.S. scholars makes a contribution to the literature on factors and the modeling of stock prices.
The paper, “An Information Factor,” proposes in essence that the momentum factor isn’t what it seems to be. Ever since the publication of a 1993 paper by Jegadeesh and Titman, this factor has generally been understood as the predictive power for past returns for future returns. This has always also seemed odd, because even a long streak of flipping a coin and getting “heads” does not predict that the next flip will be a head, nor (sorry contrarians) does it predict that the next flip will be a tails. So, why is there a “momentum factor” for stock prices?