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This article studies momentum in stock returns, focusing on the role of industry, size, and book-to-market (B/M) factors. Size and B/M portfolios exhibit momentum as strong as that in individual stocks and industries. The size and B/M portfolios are well diversified, so momentum cannot be attributed to firm- or industry-specific returns. Further, industry, size, and B/M portfolios are negatively autocorrelated and cross-serially correlated over intermediate horizons. The evidence suggests that stocks covary “too strongly” with each other. I argue that excess covariance, not underreaction, explains momentum in the portfolios.
Jonathan Lewellen (Wed,) studied this question.