Frog in the Factor Pan: Continuous information in factor momentum

Abstract: Since stock momentum stems from momentum within common risk factors, as shown through recent studies, we test whether Da et al. (2014)'s frog-in-the-pan hypothesis of limited attention is able to explain the persistence of the momentum within factor risk premia. Indeed, our results show that information arriving slowly and in small amounts is overlooked by investors and leads to persistent momentum in factor risk premia. Factor momentum decreases from the continuous information portfolio to the discrete information portfolio regardless of factor construction and portfolio conditioning method. The frog-in-the-pan hypothesis of investor limited attention is robust when applied to factor momentum.