Doctoral thesis

Essays on Equity Strategies using Fundamental Momentum

Fundamental Momentum and equity returns: Can fundamental trends predict future returns and deliver alpha? Fundamental trends carry information about future equity returns that are ...

Author(s) :

Bijon Pani, PhD

Advisory Board Member at Northern Advisors, Chicago (USA)

Abstract :

Fundamental Momentum and equity returns: Can fundamental trends predict future returns and deliver alpha? Fundamental trends carry information about future equity returns that are not captured by the level of the fundamental metrics themselves. This trend information is also not fully explained by factor models or price momentum. This paper presents a model that uses fundamental trend in a firm’s return-on-equity, gross profitability and dividend yield to sort stocks into winners and losers which delivers alpha across all market sizes. The trend model also attempts to explain the returns from the price momentum factor adding to the literature on the explanation for price momentum anomaly. This paper uses models that are built using quarterly and annual financial statements to show that trend information is neither model nor data frequency dependent.


Finding value using momentum: Value investing has been one of the prominent cornerstones of equity investment strategies. This paper provides a new methodology to select value stocks using the concept of “relative value” across firms. Results show that using multiple value ratios as foundation blocks provides better risk adjusted returns compared to using a single ratio as used by Fama-French HML factor. The use of trends in fundamental ratios helps capture value in a stock portfolio in a new way. The trend in a firm’s value metrics ranks firms that are not just cheap compared to the cross-section but also have become cheaper i.e. more “value” compared to itself over time. This is a new innovative way of measuring value in stocks. The results show that this relative value method proves effective for individual value parameters and also when combined to create a composite value model. Trends carry incremental information not captured by common factor models and control variables. This paper constructs a composite value model that uses trends in six value ratios. Momentum when combined with value generates enhanced return performance as documented in various academic literatures. This paper extends the discussion on combination of momentum with value using three different methods.

Date : 11/12/2020
Thesis Committee :

Supervisor: Frank Fabozzi, EDHEC Business School

External reviewer: Ahmet Karagozoglu, Hofstra University

Other committee member: Nikolaos Tessaromatis, EDHEC Business School

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