Does the Financial Distress Factor Drive the Momentum Anomaly?

Abstract:     
This paper brings together the evidence on two asset pricing anomalies - continuation of prior returns (momentum) and the market pricing of distressed firms. Our empirical analysis demonstrates both these effects are driven by market underreaction to bad news, and that momentum is largely subsumed by our distress risk factor. We also extend the extant literature on the market pricing of distress risk by considering this conditional on market state and GDP growth rate, and find little evidence that financial distress risk is a priced risk factor.

Number of Pages in PDF File: 37

Keywords: Asset pricing, risk factor, momentum, market classification

JEL Classification: G10, G12

working papers series