A Model of Momentum
Laura Xiaolei Liu
Guanghua School of Management, Peking University
Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)
Charles A. Dice Center Working Paper No. 2010-17
Fisher College of Business Working Paper No. 2010-03-17
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
Date posted: September 27, 2010 ; Last revised: June 17, 2011
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