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what is the momentum factor for quantitative equity portfolio investing
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STRATxAI

May 2024 · 5 min read

Momentum Factor

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What is the momentum factor ?

The momentum factor is one of the most hotly contested yet natural factors to exist. Momentum is a classic phenomenon for stocks - winners beget winners and losers can find it tough to recover losses. Trend-following is a popular technical approach favoured by many investors, both professional and retail and makes intuitive sense.

Since the global financial crisis, Central Banks acted in a coordinated way and each embarked on large-scale quantitative easing (QE) campaigns. As a result, nearly all asset prices inflated over the course of a decade and a momentum-style follow the trend strategy worked very well. Going long equities and long bonds, similar to the risk-parity strategy, was a very successful investment and both markets rallied.

Momentum can also occur on a sector basis. The technology sector rally from 2010 onwards, whilst based on a fundamental shift in productivity and usage, can also be put down to this fear of missing out as technology winners turned into bigger winners and the price action was a self-fulfilling prophecy.

Reasons for the existence of the momentum factor
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