We have focused throughout on the six-month/six-month strategy, because it has become a standard benchmark for evaluating momentum strategies. But of course this is somewhat arbitrary. To provide more information, Figure 2 plots cumulative returns in event time. In so doing, we use the methodology of Table 6—we assign stocks to performance categories based on six months’ prior beta-adjusted returns, and do an independent sort based on the analyst-coverage residuals from Model 1. We then track cumulative beta-adjusted returns on a month-by-month basis, out to 36 months.
In Panel A, we plot the cumulative returns to the P3-P1 momentum strategy separately for the low-coverage subsample SUB1 and the high-coverage subsample SUB3. There appear to be two distinct things going on. First, up to about the ten-month mark, we see roughly a linear extrapolation of our earlier results: momentum strategies continue to earn incremental monthly profits in both SUB3 and SUB1. but the effect is stronger in SUB1, so that the cumulative differential keeps on widening. After this point, something else quite interesting happens. The cumulative performance of the high-coverage subsample SUB3 flattens out-in other words, there is no more momentum left after ten months for the high-coverage stocks.36 But the low-coverage subsample SUB1 continues to display some momentum out to about the two-year mark. Consequently, the cumulative differential between SUB1 and SUB3 keeps on growing until this point. Twenty-four months after portfolio formation, the total P3-P1 profit for SUB1 is 19.63%, vs. 8.90% for SUB3, a difference of 10.73%.