THE TERM STRUCTURE OF STOCK RETURN CONTINUATION

Abstract

A recent paper by Robert Novy Marx (2012; RNM) have raised an unexplored question on the momentum anomaly by suggesting the existence of an intermediate term structure to momentum. Stock returns exhibit stronger correlation with the past 7 to 12 months performance than the recent 6 months performance, and an intermediate momentum strategy sorting stocks based on past 7 to 12 months returns have higher pro tability than simply sorting stocks based on their recent 6 month returns. I nd that while there are seasonality-driven estimation bias in RNM's results, the intermediate momentum anomaly does exist exclusively during periods of low market volatility and for low volatility stocks even after seasonal bias is accounted for. I further show RNM's intermediate momentum structure can be conceptually accounted for by extending Hong and Stein's (1999) model to include arbitrage behaviour.