Glossary

Momentum

The tendency of stocks that have risen over the past year to keep rising for a while, and of fallers to keep falling.

Momentum is usually measured as a stock's return over the past 12 months, often leaving out the most recent month. Narasimhan Jegadeesh and Sheridan Titman documented it in 1993, and it has been found in many markets since.

Momentum says what the market has been doing, not why. It can reverse sharply, as it did in 2009, when the previous year's losers rebounded fastest.

It is one of the six standard factors researchers use to check whether a strategy's returns are explained by known effects.

  • Backtest: A test of an investment rule on past data, to see how it would have done.
  • Drawdown: The fall from an investment's peak value to its lowest point before it recovers.

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