The momentum strategy is typically implemented by buying assets with past positive returns and selling (shorting) assets with past negative returns under the assumption that past winners tend to continue to yield positive returns, while past losers tend to continue to yield negative returns. There are two types of momentum: relative momentum and absolute momentum. The relative momentum strategy considers relative stock returns, while the absolute momentum strategy considers absolute stock returns. Relative momentum investors buy outperforming assets and sell underperforming assets by comparing assets against one another's past performance. However, absolute momentum investors compare an asset against its own historical performance. These investors buy positive returning assets and sell negative returning assets. The primary difference is that relative momentum makes no distinction about return direction. If all assets are losing value, relative momentum will seek to invest in assets that are going down the least, while absolute momentum will seek to avoid negative returning assets. For example, when all stocks show negative returns, the absolute momentum strategy does not buy any stocks, while the relative momentum strategy buys stocks that are going down the least.

The momentum investment strategy proposed by Jegadeesh and Titman is widely utilized by practitioners and academics. The portfolio formation period (J) and holding period (K) need to be set first to implement the momentum investment strategy. The portfolio formation period (J) is the past return period required to measure the momentum, such as 1, 3, 6, 9, and 12 months prior to the portfolio construction time. The holding period (K) is the amount of time that the portfolio is held by an investor. For example, a portfolio with J = 1 and K = 3 includes stocks that recorded positive returns for one month prior to the portfolio construction time, and it is held for the next three months to generate monthly average return.

Since the late 1990s, the momentum strategy has received extensive research attention in the finance discipline. Initial studies revealed that the momentum investment strategy is profitable in the national stock market for several developed countries. A momentum effect has also been found in foreign exchange markets. In the following years, stocks in emerging markets have also shown momentum effects. In addition, the momentum effect has been determined to exist during both economic booms and recessions. Later, the momentum effect was found to be significant for corporate bonds and government bonds.

In all the experiments in this study, we use a long-only absolute momentum strategy to buy only stocks or index with positive returns.