Time-varying expected momentum profits

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This paper examines the time variations of expected momentum profits using a two-state Markov switching model with time-varying transition probabilities to evaluate the empirical relevance of recent rational theories of momentum profits. We find that in the expansion state the expected returns of winner stocks are more affected by aggregate economic conditions than those of loser stocks, while in the recession state the expected returns of loser stocks are more affected than those of winner stocks. Consequently, expected momentum profits display strong procyclical variations. We argue that the observed momentum profits are the realization of such expected returns and can be interpreted as the procyclicality premium. We provide a plausible explanation for time-varying momentum profits through the differential effect of leverage and growth options across business cycles.
Publisher
ELSEVIER SCIENCE BV
Issue Date
2014-12
Language
English
Article Type
Article
Keywords

STOCK RETURNS; BUSINESS-CYCLE; CROSS-SECTION; INFORMATION UNCERTAINTY; TRADING STRATEGIES; ASSET RETURNS; REAL ACTIVITY; COMMON-STOCK; INFLATION; MARKET

Citation

JOURNAL OF BANKING & FINANCE, v.49, pp.191 - 215

ISSN
0378-4266
DOI
10.1016/j.jbankfin.2014.09.004
URI
http://hdl.handle.net/10203/195273
Appears in Collection
MT-Journal Papers(저널논문)
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