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Decomposing momentum: Fundamentals versus persistent mispricing

Author

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  • Kim, Hyeonjun
  • Ryu, Doojin

Abstract

We decompose the momentum indicator into components reflecting present-value pricing and persistent mispricing. The cross-sectional momentum signal reflects both fundamental growth and mispricing-driven price dynamics. Theoretical predictions suggest that momentum profits orthogonal to the real rate capture persistent mispricing. This residual, representing the mispricing-driven portion of momentum profits, is informative about downside risk and market drawdowns, indicating that momentum embeds signals of overpricing with practical implications for drawdown prediction.

Suggested Citation

  • Kim, Hyeonjun & Ryu, Doojin, 2025. "Decomposing momentum: Fundamentals versus persistent mispricing," Finance Research Letters, Elsevier, vol. 86(PF).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pf:s1544612325020069
    DOI: 10.1016/j.frl.2025.108752
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    References listed on IDEAS

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    1. Doojin Ryu & Doowon Ryu & Heejin Yang, 2025. "Investor Sentiment, Mispricing, and Limited Arbitrage in the Futures Market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 45(8), pages 879-895, August.
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    Keywords

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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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