Paper: arXiv 2301.11394

Authors: Mykola Pinchuk

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.

Complexity vs Empirical Score

  • Math Complexity: 3.0/10
  • Empirical Rigor: 6.0/10 (capped from 7.5: transaction costs not modelled; see penalty flags)
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper relies heavily on standard empirical asset pricing methodologies (Fama-French regressions, long-short portfolio backtests) without complex mathematical derivations. It provides a solid re-examination of the customer momentum anomaly, offering valuable post-discovery out-of-sample decay analysis.

Research Flowchart

  flowchart TD
    A[Research Goal: Evaluate Customer Momentum & Post-Discovery Behavior] --> B[Data Inputs: Firm Returns & Customer-Supplier Linkages]
    B --> C[Construct Long-Short Customer Momentum Decile Portfolios]
    C --> D[Evaluate Returns via Fama-French Factor Models]
    D --> E[Test Interactions: Price/Earnings Momentum & Small-Large Lead-Lag]
    E --> F[Findings: Significant Alpha 106-122 bps/mo, Distinct from Price/SUE Momentum]
    F --> G[Outcome: Significant Return Decay Post-Discovery Due to Investor Exploitation]