NBA Ball

The Toronto crowded erupted in thunderous applause as the Raptors were minutes away from hoisting their first Larry O’Brien trophy in team history. And then the Splash Brothers scored a pair of late-game threes. The series now returns to Oakland where the Raptors have a second chance at sealing the series.

Despite last night’s outcome, no one expected the series to play out as it has. Both teams entered the Finals with momentum on their side; the Warriors appeared to be in Championship form after sweeping the Trailblazers while the Raptors were coming off a 4-game win streak against the number 1 seed Milwaukee Bucks. Any way you look at it, the matchup should have been closer.

But perhaps the difference in gameplay was predictable all along. Using a basic momentum strategy from finance, outlined in Wes Grey’s book Quantitative Momentum, can show us whether the Raptors were in a better position from the start.

Defining Momentum

Momentum represents the tendency for an asset to move higher after recent outperformance and vice versa in volatile situations. It was first popularized by Cliff Asness, founder and managing principal at AQR, and has since been studied by well-known academics and practitioners. A basic momentum strategy captures the upside of stocks already in an uptrend, as measured by price over the past 12 months minus one month.

Some of these assets will exhibit smoother returns, in which prices gradually trend up, while others will move up and down like a ride at Six Flags. To control for this, practitioners compare the number of days a stock rises or falls. If one exceeds the other, it suggests that recent performance may not be due to momentum but another factor. Let’s see how this works in practice.

NOTE: There is far more nuance to this that you can discover from the individuals above.  

A Sprint Down Wall Street

In Quantitative Momentum, Wes Grey lists five steps to building a basic momentum strategy;

    1. Build an Investable Universe
    2. Rank Stocks by 12-month Returns
    3. Identify Whipsaw Patterns
    4. Screen for Seasonality
    5. Invest with Conviction

The entire process helps investors build a concentrated portfolio of stocks with the highest quality momentum.

Let’s see how this works in basketball and for more clarity into the process, read the book.

Back to the Court

The NBA functions differently than the stock market. Basketball analysts judge games by various on-court metrics—on top of wins and losses—rather than how well a team or player performed from the night before. One popular stat is plus-minus, which tracks the impact an individual player has on the scoring margin of a game. Kawhi Leonard, for instance, lifted the Raps to a win last Friday with a +13 plus-minus, meaning the Raptors outscored the Warriors by 13 points with the Claw on the court. It also suggests he made a bigger impact on the game than his teammate Marc Gasol who was +1 for the evening.

That said, adjusting the same statistic per 48 minutes changes the conversation. Look at the average adjusted plus-minus for the Raptors and Warriors; Kawhi trailed all other starters, besides Klay, despite being the most valuable player on the court.  Does that mean he is overrated? No. What it says is Kawhi shouldn’t play 48 minutes a game (or even 40 for that matter).

The question now is about momentum. Were the Raptors’ players, as measured by +/-, trending higher heading into the series? Our momentum model would say so.

Exhibit: Momentum Heading into the Finals

Bubble Chart

In the games leading up to the finals, Steph Curry was the only Warrior with more momentum than the Raptors’ starters. What’s more, Golden State’s second-based player Kevin Durant (based on these scores) missed a lion share of the series, save for the first quarter of Game 5. This significant absence plus the quantifiably worse gameplay gave the Raptors a leg up on the Warriors. As a result, the series, perhaps predictably, favors Toronto.

Of course, many other factors can be used to judge performance on the court or on Wall Street. Momentum is just one that helps paint a clearer picture.

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