The investment universe consists of all firms with non-missing customer links, present in merged CRSP/Compustat.
ASSET CLASS: stocks | REGION: United States | FREQUENCY:
Monthly | MARKET: equities | KEYWORD: Momentum
I. STRATEGY IN A NUTSHELL
The customer momentum strategy ranks firms based on the past returns of their customers’ portfolios instead of their own. Value-weighted long-short portfolios are constructed monthly, capturing performance driven by customer behavior.
II. ECONOMIC RATIONALE
Customer momentum arises from limited attention and lead-lag effects between firms and their customers. Larger customers drive stronger momentum, while post-discovery exploitation reduces its magnitude, providing insight into market inefficiencies and investor behavior.
III. SOURCE PAPER
Customer Momentum [Click to Open PDF]
Mykola Pinchuk, University of Rochester, Simon Business School
<Abstract>
This paper examines customer momentum, defined as a positive relationship between a firm’s returns and past returns of its customers. I confirm previous evidence (Cohen and Frazzini 2008) that customer momentum is both statistically and economically significant. Long-short equally-weighted (value-weighted) decile portfolio generates a monthly return of 122 (106) basis points and a t-statistic above 4 (2.8) with respect to Fama-French factor models. The paper reports that customer momentum neither explains nor is explained by price momentum and earnings momentum. Customer momentum is partially driven by the lead-lag relationship between small and large stocks. I find that in the post-discovery sample, customer momentum has a smaller magnitude and loses statistical significance. The results are consistent with the hypothesis that after its discovery, customer momentum decreased due to exploitation by investors.
IV. BACKTEST PERFORMANCE
| Annualised Return | 13.49% |
| Volatility | 24.09% |
| Beta | N/A |
| Sharpe Ratio | 0.56 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
