Aggregate Momentum Spillover Factor Predicts Stock Returns
Log in to collectAcademic paper
Leading the Market: The Role of Momentum Spillovers
Honghai Yu; Zhuo Chen; Xianfeng Hao
- Nanjing University
- ?Nanjing University - School of Management and Engineering
Strategy in a nutshell
The investment universe comprises U.S. stock markets (NYSE/AMEX/NASDAQ).
Universe: U.S. stocks (NYSE/AMEX/NASDAQ). Use LASSO regression on past year’s daily returns to identify each stock’s connected peers. Compute momentum spillover MSi=Ri−Ri∗MS_i = R_i − R^*_iMSi=Ri−Ri∗ and aggregate into decile-based predictor AMS. A mean-variance investor allocates monthly between equities and T-bills using forecasted excess returns and equity weight 1/3×rt+1/variance1/3 × r_{t+1}/\text{variance}1/3×rt+1/variance, rebalancing monthly.
Economic rationale
Aggregate momentum spillover captures stock connections missed by standard regressions. LASSO identifies meaningful linkages, supporting market-level underreaction and limited attention, offering a novel predictive channel beyond traditional investor attention indices.