Industry momentum and common factors

Jegadeesh and Titman [1993. Journal of Finance 48, 65-91] suggest that if there is a delayed reaction to common information in the stock market, a factor model should include not only contemporaneous but also lagged common factors. We therefore consider a delayed-reaction model that includes both contemporaneous and lagged Fama-French factors. Empirically, we find that common risk based on such a delayed-reaction model can largely explain the momentum in industry portfolio returns. Thus, the present paper rejects the idea that momentum is mainly due to idiosyncratic risk and supports the idea that momentum is due to common risk.