Productivity, Asset Returns, and International Index Momentum

38 Pages Posted: 17 Mar 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: December 2007

Abstract

This paper demonstrates that rational momentum can exist in an economy where autocorrelated risk and convex dividend policies are present. It then studies the momentum role of firms. When a firm actively creates positive productivity shocks and accordingly increases its production scale, its output will be convex in productivity. This productivity convexity can generate momentum because a positive productivity shock helps the firm to achieve both higher realized past return and higher expected future return (due to increased exposure to productivity risk). Empirically, productivity-based return components (PBR) on average explain over 50% of the momentum effect in international index returns. This result is robust after adjusting for other risk factors. Macroeconomic variables are also shown to have certain explanatory power for momentum, partially through PBR. Finally, as a robustness check, we find that PBR also explains about 30% of industry momentum in the US.

Suggested Citation

Chen, Zhiwu and Wu, Yangru and Zhang, Hong, Productivity, Asset Returns, and International Index Momentum (December 2007). Available at SSRN: https://ssrn.com/abstract=1106807 or http://dx.doi.org/10.2139/ssrn.1106807

Zhiwu Chen (Contact Author)

University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China

Yale University - International Center for Finance ( email )

Box 208200
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United States
203-432-5948 (Phone)
203-432-6970 (Fax)

Zebra Capital Management, LLC ( email )

612 Wheelers Farms Road
Milford, CT 06461
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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

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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