Previous studies have found that previous winners over a 3-12 month period will show 1%/month profits over the next 12 months. This has been empirically confirmed across several markets and time periods, even back to the 1920s.
Several reasons for this phenomenon to occur have been proposed: under-reaction to information; delayed over-reaction to information; or an undetected risk. In particular Conrad and Karl in a previous study find it to be due to cross-sectional dispersion in unconditional expected returns.
The authors find Conrad and Karl's study to be flawed due to a small sample bias, and they prove that their conclusion explains very little, if any, of the momentum profits. In fact, they say "virtually none of the momentum profits can be attributed to compensation for risk."
Jegadeesh, N., & Titman, S. (2002). Cross-Sectional and Time-Series Determinants of Momentum Returns. Review of Financial Studies, 15(1), 143–157.
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