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http://ssrn.com/abstract=1683385
 
 

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A Model of Momentum


Laura Xiaolei Liu


Hong Kong University of Science & Technology

Lu Zhang


Ohio 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

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Date posted: September 27, 2010 ; Last revised: June 17, 2011

Suggested Citation

Liu, Laura Xiaolei and Zhang, Lu, A Model of Momentum (June 2011). Charles A. Dice Center Working Paper No. 2010-17. Available at SSRN: http://ssrn.com/abstract=1683385 or http://dx.doi.org/10.2139/ssrn.1683385

Contact Information

Laura Xiaolei Liu
Hong Kong University of Science & Technology ( email )
Clear Water Bay, Kowloon
Hong Kong
852 2358 7661 (Phone)
852 2358 1749 (Fax)
Lu Zhang (Contact Author)
Ohio State University - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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