Decomposition of Momentum Return: Which Component Contributes Most?

41 Pages Posted: 8 May 2008

See all articles by Sirajum Munira

Sirajum Munira

City University - Sir John Cass Business School - Faculty of Finance

Yaz Gulnur Muradoglu

Queen Mary University of London; City University London - Sir John Cass Business School

Soosung Hwang

Sungkyunkwan University - Department of Economics

Date Written: May 7, 2008

Abstract

This paper investigates the contribution of common components and stock specific components in generating momentum return. Using a decomposition approach in a multi-dimensional framework we report that momentum return resulted from all stocks listed in the NYSE, AMEX and NASDAQ from 1926 through 2005 is more a contribution of stock-specific components. Our decomposition approach shows that the contribution of stock-specific component is 90 percent and 65 percent for Fama-French three factors and macroeconomic variables, respectively, at the portfolio level. Whilst, at the individual stock level the contribution of stock-specific components declines, on average, by 22 percent and 36 percent, respectively, for Fama-French three factors and macroeconomic factors. Our results are robust in different sub-periods and when predictor variables are employed. We conclude that the profitability of momentum return results more from stock-specific components than from common components.

Keywords: Common components, Stock-Specific components, Fama-French factors, Macroeconomic factors

JEL Classification: G11, G12, G19

Suggested Citation

Munira, Sirajum and Muradoglu, Yaz Gulnur and Hwang, Soosung, Decomposition of Momentum Return: Which Component Contributes Most? (May 7, 2008). Available at SSRN: https://ssrn.com/abstract=1130610 or http://dx.doi.org/10.2139/ssrn.1130610

Sirajum Munira (Contact Author)

City University - Sir John Cass Business School - Faculty of Finance ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44(0) 20 7040 8208 (Phone)
+44(0) 20 7040 8546 (Fax)

Yaz Gulnur Muradoglu

Queen Mary University of London ( email )

Francis Bancroft Building
Mile End Road
London, E1 4NS
United Kingdom

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 0124 (Phone)
+44 20 7040 8853 (Fax)

Soosung Hwang

Sungkyunkwan University - Department of Economics ( email )

25-2 Sungkyunkwan-ro
Jongno-Gu
110-745 Seoul
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)

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