Momentum and Value Reimagined: The Impact of Information Discreteness and Quality Filters on Investment Returns in the US Equity Market

Abstract

We analyze the combination of value and momentum strategies by further augmenting value with a quality signal and momentum with an information discreteness signal. Our study involves the US equity market, utilizing the CRSP database as our primary dataset. We conduct a comprehensive backtest of portfolios formed from 1984 to 2023. The performance of independent strategies of quality and information discreteness is assessed and following that, we ascertain the relative effectiveness of augmenting value with a quality signal and momentum with the information discreteness signal. We make a thorough analysis of the performance measures and find that information discreteness successfully captures the frog-in-the-pan phenomenon, thus successfully augmenting the performance of Momentum with its true strength being in avoiding future losers. The quality signal successfully augments value due to its ability to pick stocks that have fundamental ratios that investors fail to appropriately price. Simultaneously combining all four signals together fails to outperform the traditional value and momentum strategy, though it does outperform it the longer rebalancing schedules get.