Can Common Components Eliminate Momentum Returns?
41 Pages Posted: 8 May 2008
Date Written: May 7, 2008
This paper investigates the presence of momentum return when priced for common components. Using a sample period from 1926 through 2005 for all stocks listed in the NYSE, AMEX and NASDAQ we show significant momentum return remains both at the portfolio level and at the individual stock level. We report positive and significant alpha of 0.009 when Fama-French three factors and macroeconomic factors are used as common components at the portfolio level. At the individual stock level, though Fama-French factors cannot eliminate momentum return, the premium diminishes when macroeconomic variables are employed. The result is more pronounced when lagged variables are in play and during market upturn. Our results are robust in different sub-periods and when contemporaneous and lagged variables are used. We conclude that common components cannot eliminate momentum return; the explanatory power of macroeconomic variable is conditioned on assumptions like predictor variable and market condition.
Keywords: Momentum return, Common Components, Market States, Fama-French factors, Macroeconomic factors
JEL Classification: G11, G12, G19
Suggested Citation: Suggested Citation