Explaining Momentum and Value Simultaneously

Abstract

This paper proposes a unified risk-based explanation for momentum profits and the value premium in a neoclassical investment-based model. Winner firms have higher short-term profitability and investment commitment, and hence more negative exposure to the price of investment goods than loser firms. Value firms have lower long-term profitability and higher operating leverage, and hence higher sensitivity to neutral productivity shocks than growth firms. The model reproduces the coexistence of momentum profits and the value premium, the failure of the unconditional CAPM, the predictability of momentum profits by market states, and the long-term reversal of momentum profits.

Keywords: Momentum, Value, Investment-based asset pricing

JEL Classification: G12, E44