Rank a universe by intermediate-term momentum and surface the strongest names
The momentum effect is one of the most robust anomalies in finance. Stocks that have performed well over the past 3-12 months tend to continue performing well in the near future. However, we skip the most recent 1-2 months to avoid short-term mean reversion.
Methodology: The 12-2 month momentum strategy ranks stocks by their return over the past 12 months, excluding the most recent 2 months to avoid short-term reversals. This is based on Jegadeesh & Titman (1993) academic research.
The 12-2 month momentum strategy looks at stock returns from 14 months ago to 2 months ago, effectively measuring performance over a 12-month period while skipping the most recent 2 months.
Research shows that returns over the past 1-2 months tend to reverse (mean revert) rather than continue. By skipping this period, we avoid this short-term reversal effect and focus on the intermediate-term trend that tends to persist.