Decomposition of Momentum Return: Which Component Contributes Most?
41 Pages Posted: 8 May 2008
Date Written: May 7, 2008
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: Suggested Citation