Carhart added a momentum factor for asset pricing of stocks.
[1][2] Momentum is the speed or velocity of price changes in a stock, security, or tradable instrument.
The Monthly Momentum Factor (MOM) can be calculated by subtracting the equal weighted average of the lowest performing firms from the equal weighted average of the highest performing firms, lagged one month (Carhart, 1997).
A stock would be considered to show momentum if its prior 12-month average of returns is positive, or greater.
Momentum strategies continue to be popular in financial markets.
Three commonly used methods to adjust a mutual fund's returns for risk are: 1.
In each case, we regress the excess returns of the asset on an intercept (the alpha) and some factors on the right hand side of the equation that attempt to control for market-wide risk factors.