Concept Links and Return Momentum

Unlike traditional asset categories (e.g., industry classifications) that are generally defined clearly, some groups of stocks are tied to a certain loosely defined “concept” (e.g., e-commerce). When investors find it difficult to analyze ambiguous concept-oriented information, information diffuses slowly, leading to “concept momentum”. Based on unique Chinese stock concept data, this study constructs a concept momentum strategy that involves buying stocks from past winning concepts and selling stocks from past losing concepts, which can generate pronounced abnormal returns. Neither risk factors, firm-level momentum, nor industry-level momentum can explain concept momentum. Furthermore, we find that both the underreaction and cross-stock leadlag effect channels can cause slow information diffusion and drive concept momentum. Moreover, the concept momentum effect is stronger for more ambiguous concepts, for concepts that attract less investor attention, and following high-sentiment periods.