Momentum, Business Cycle and Time Varying Expected Returns
Emory University - Department of Finance
London Business School
London Business School Accounting Subject Area No. 020; AFA 2001
In recent years there has been a dramatic growth in academic interest in the predictability of asset returns based on past history. A growing number of researchers argue that time-series patterns in returns are due to investor irrationality, and thus can be translated into abnormal profits. Continuation of short-term returns or momentum is one such pattern that has defied any rational explanation, and is at odds with market efficiency. This paper argues that profits to momentum strategies are a result of persistent differences in conditionally expected returns, and are consistent with time-varying expected returns. Standard macroeconomic variables are able to predict momentum payoffs, and these payoffs disappear once returns are adjusted for variations in expected returns.
Number of Pages in PDF File: 47working papers series
Date posted: November 24, 2001
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