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Introducing Momentum: A Systematic Equity Strategy Factor

In this white paper we introduce Momentum, one of the Systematic Equity Strategy (SES) factors modeled by MSCI Equity Analytics Research.  This paper finds that the SES Momentum factor measures the tendency of equities that have outperformed the market to continue outperforming while underperformers keep underperforming. The persistence of this factor is well documented, and so are the periodic, sharp reversals at market inflection points. Behavioral finance theory supports these observations, and they form an important part of MSCI’s crowding risk insight. While this paper focused on a traditional momentum measure, it also addressed two others: Short-Term Reversal and Long-Term Reversal. Monitoring portfolio exposures to all three factors can provide important insights for portfolio construction and risk management.