Momentum and the Firm Fundamental Cycle
Log in to collectAcademic paper
Yufeng Han; Zhaodan Huang; Weidong Tian; Guofu Zhou
- University of North Carolina at Charlotte
- ?University of North Carolina (UNC) at Charlotte - Finance
- Utica College
- ?Utica University
- ?University of North Carolina (UNC) at Charlotte - The Belk College of Business Administration
- Washington University in St. Louis
- ?Washington University in St. Louis - John M. Olin Business School
Strategy in a nutshell
Ranks U.S. stocks using 13 seasonally adjusted fundamental ratios and quarterly shocks, aggregated via partial least squares. Goes long on the top decile and short on the bottom decile of forecasted returns, with quarterly rebalancing.
Economic rationale
Firm fundamentals are cyclical, driving momentum after positive shocks and reversals following negative shocks. Stock return patterns reflect rational responses to these changing fundamentals rather than behavioral biases, making rebalancing timing critical.
Backtest performance
Annualised return8.8%
Volatility6.82%
Sharpe ratio0.7
Maximum drawdown-21.44%