Financial academics have described so many equity factors that the whole universe of them is sometimes called “factor zoo”. Therefore, it is no surprise that there is a quest within an academic community to bring some order into this chaos . An interesting research paper written by Favilukis and Zhang suggests explaining a lot of equity factors with momentum anomaly.
Authors: Favilukis, Zhang
Title: One Anomaly to Explain Them All
We argue that conditional on the existence of momentum, many other asset pricing anomalies are not particularly anomalous. First, empirically, we show that portfolios within which conditional momentum strategies (ie, buying winners and selling losers) are unprofitable, tend to have significantly higher unconditional average returns than portfolios within which momentum strategies are profitable. Second, we rationalize this in a standard model to which we add momentum; the intuition is that assets with more conditional trading opportunities are bid up by speculators and tend to have higher prices and lower unconditional returns. Third, we show that for many asset pricing anomalies, a momentum strategy tends to be unprofitable within the long leg, but profitable within the short leg.
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