Understanding the Nature of the Risks and the Source of the Rewards to Momentum Investing

It is well established that recent prior winner and loser stocks exhibit return continuation; a momentum strategy of buying recent winners and shorting recent losers appears profitable in the post 1945 era. In contrast, the risk exposure of such a strategy has not been well understood; the strategy's unconditional average risk exposure can be deceptive. The stock selection method of a momentum strategy guarantees that large and time varying factor exposured will be borne in accordance with the performance of the common risk factors during the periods in which stocks were ranked to determine their winner/losed status.