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Illusion momentum and cross-sectional returns

Author

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  • Iwanaga, Yasuhiro
  • Hirose, Takehide

Abstract

This study proposes a new momentum-related signal called “illusion momentum.” We confirm the effect of illusion momentum in both the Japanese and U.S. stock markets, where stocks with high illusion momentum tend to have higher future returns than those with low illusion momentum. The effectiveness of illusion momentum may be rooted in a cognitive bias where investors mistakenly interpret cumulative sum returns as cumulative returns. Notably, the effect of illusion momentum becomes stronger in bear markets, where traditional momentum strategies tend to struggle, and does not exhibit characteristics similar to selling call options. Considering that illusion momentum is also effective within a universe of large-cap stocks, this study has several practical applications.

Suggested Citation

  • Iwanaga, Yasuhiro & Hirose, Takehide, 2026. "Illusion momentum and cross-sectional returns," Pacific-Basin Finance Journal, Elsevier, vol. 96(C).
    • Handle: RePEc:eee:pacfin:v:96:y:2026:i:c:s0927538x26000090
    DOI: 10.1016/j.pacfin.2026.103063
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    References listed on IDEAS

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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