Momentum and Price Paths

Smooth versus Rough

Introduction

Momentum is probably the most well-known anomaly, documented across time, asset classes, and countries. Recent research suggests that the price path of a stock matters, with a smooth price path being a stronger predictor of future returns than a rough one. I evaluate different measures of trend smoothness and assess their performance on US stocks. Sorting stocks based on the smoothness of their price paths appears to enhance risk-adjusted returns compared to sorting purely on past returns.