Productivity, Asset Return, and International Index Momentum

38 Pages Posted: 26 Feb 2008

See all articles by Zhiwu Chen

Zhiwu Chen

University of Hong Kong; Yale University - International Center for Finance; Zebra Capital Management, LLC

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Hong Zhang

Tsinghua University - PBC School of Finance

Date Written: February, 25 2008

Abstract

This paper first demonstrates that, in a discrete time framework, rational momentum can exist in an economy that has autocorrelated risk and convex dividend policies. It then uses this framework to examine the momentum role of firms. When firms actively create positive productivity shocks and increase overall production scale accordingly, outputs will be convex in productivity. This productivity convexity can generate momentum because a positive productivity shock helps a firm to have both higher realized past return and higher expected return (due to increased exposure to productivity risk). Empirically, productivity-based return components (PBR) usually explain more than 50% of international index momentum return. This result is robust in the presence of other risk factors. Macroeconomic variables also have a certain explanatory power for momentum, partially through PBR. Finally, as a robustness check, PBR also explains about 30% of industry momentum in the US.

Suggested Citation

Chen, Zhiwu and Wu, Yangru and Zhang, Hong, Productivity, Asset Return, and International Index Momentum (February, 25 2008). ; EFA 2008 Athens Meetings. Available at SSRN: https://ssrn.com/abstract=1097486 or http://dx.doi.org/10.2139/ssrn.1097486

Zhiwu Chen

University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520-8200
United States
203-432-5948 (Phone)
203-432-6970 (Fax)

Zebra Capital Management, LLC ( email )

612 Wheelers Farms Road
Milford, CT 06461
United States

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

Hong Zhang (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

HOME PAGE: http://eng.pbcsf.tsinghua.edu.cn/content/details167_7995_x.html

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