Abstract

http://ssrn.com/abstract=2054707
 
 

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Momentum and Aggregate Default Risk


Arvind Mahajan


Texas A&M University - Department of Finance

Alex Petkevich


The University of Toledo - Department of Finance

Ralitsa Petkova


Purdue University - Krannert School of Management

May 6, 2012

Mays Business School Research Paper No. 2012-39

Abstract:     
In this paper, we explain momentum profits using innovations in aggregate economy-wide default risk. First, we show that momentum returns are positive only during high default shocks and nonexistent otherwise. Second, we present evidence suggesting that a conditional default shock factor is priced in the cross-section and can explain a large portion of the total momentum returns. According to our results, winners have potentially higher risk than losers during periods of high default shocks. We confirm this finding in alternate sub-periods where momentum is generally not observed and as well as in international data. We also provide an explanation for this finding by linking momentum profits to potential shareholder recovery during financial distress. We find that winners tend to have relatively higher risk in worsening aggregate default conditions due to lower shareholder bargaining power. These results indicate that momentum profits contain a systematic component related to aggregate default and can be explained in a rational framework.

Number of Pages in PDF File: 62

Keywords: Momentum, Aggregate Default Shocks, Shareholder Bargaining Power

JEL Classification: G11, G12

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Date posted: May 15, 2012  

Suggested Citation

Mahajan, Arvind and Petkevich, Alex and Petkova, Ralitsa, Momentum and Aggregate Default Risk (May 6, 2012). Mays Business School Research Paper No. 2012-39. Available at SSRN: http://ssrn.com/abstract=2054707 or http://dx.doi.org/10.2139/ssrn.2054707

Contact Information

Arvind Mahajan (Contact Author)
Texas A&M University (TAMU) - Department of Finance ( email )
430 Wehner
College Station, TX 77843-4218
United States
979-845-4876 (Phone)

Alex Petkevich
The University of Toledo - Department of Finance ( email )
2801 W. BANCROFT ST.
Mail Stop 103
Toledo, OH Ohio 43606
United States
HOME PAGE: http://homepages.utoledo.edu/apetkev
Ralitsa Petkova
Purdue University - Krannert School of Management ( email )
1310 Krannert Building
West Lafayette, IN 47907-1310
United States
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