Value and Momentum Everywhere
Read the paperopens doi.org in a new tab
What they found
The authors tested value and momentum in eight markets and asset classes: individual stocks in the U.S., U.K., Europe, and Japan, plus country equity indices, currencies, government bonds, and commodity futures. Both effects showed up in every one. More striking, value returns were correlated across asset classes and so were momentum returns, and value and momentum were negatively correlated with each other, so a combined portfolio had a much better risk-adjusted return than either alone. Funding liquidity risk partly explained the common movements.
What you can use
- Momentum and value are not stock-market quirks; they show up in currencies, commodities, bonds, and indices too.
- Because value and momentum are negatively correlated, holding both smooths returns dramatically.
- Momentum strategies across asset classes tend to lose together when liquidity dries up, so diversifying across markets does not remove that risk.
Caveats
Long-short factor portfolios that assume institutional-grade execution and shorting. Sample 1972 to 2011 for most series; commodities and bonds have shorter histories. A free working-paper version is on SSRN and the AQR site.
Tags: momentum, value, multi-asset, factor
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.