Short-Term Idiosyncratic Momentum in Cross-Sectional Stock Returns : Empirical Evidence

This study finds short-term idiosyncratic momentum (iMOM) in cross-sectional stock returns. The short-term iMOM utilizes the daily residual returns estimated by pricing models in the previous month. This is different from idiosyncratic volatility (IVOL), which uses the volatility of the same residual returns and short-term reversals (SREV) using returns in the previous month. The short-term iMOM portfolios persistently show significant positive performance from one to eight months in future periods. This persistent pattern is due to the under-reacted trading behavior of institutional investors’ over-selling of winner stocks in short-term iMOM. Moreover, the short-term iMOM has unique information that cannot be explained by known factor premiums and shows significant evidence even after controlling for firm-specific variables related to arbitrage constraints in the previous month. An interesting finding is that short-term iMOM and IVOL are in a reciprocal barometer relationship on whether or not to have predictive power on the expected returns of stocks; that is, the existence of (non-) significant short-term iMOM implies the existence of (non-) significant IVOL, and vice versa. Therefore, this finding is expected to lead to further studies that verify short-term iMOM and provide additional insight into the IVOL puzzle