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A Model of MomentumLaura Xiaolei LiuHong Kong University of Science & Technology Lu ZhangOhio State University - Fisher College of Business; National Bureau of Economic Research (NBER) June 2011 Charles A. Dice Center Working Paper No. 2010-17 Fisher College of Business Working Paper No. 2010-03-17 Abstract: Optimal investment of firms implies that expected stock returns are tied with the expected marginal benefit of investment divided by the marginal cost of investment. Winners have higher expected growth and expected marginal productivity (two major components of the marginal benefit of investment), and earn higher expected stock returns than losers. The investment model succeeds in capturing average momentum profits, reversal of momentum in long horizons, as well as the interaction of momentum with market capitalization, firm age, trading volume, and stock return volatility. However, the model fails to reproduce procyclical momentum profits.
Number of Pages in PDF File: 40 Keywords: Momentum Profits, Investment-Based Asset Pricing, GMM, Expected Growth JEL Classification: E22, E44, G12, G14, G31 working papers seriesDate posted: September 27, 2010 ; Last revised: June 17, 2011Suggested CitationContact Information
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