Decomposing the Momentum in the Japanese Stock Market

In this study, we decompose momentum indicators for the Japanese stock market into two components, high-to-price and price-to-high. High-to-price has a lower downside risk and higher Sharpe ratio than price-to-high. We find that a conventional momentum strategy combines the characteristics of high-to-price in a bull market and those of price-to-high in a bear market. In particular, the large drawdowns of momentum strategies reported in previous studies seem to be largely owed to those of price-to-high in bear markets. It is possible that the mechanism generating factor returns differs among the three strategies.