Time-Varying Momentum Profitability
49 Pages Posted: 14 Jan 2010 Last revised: 19 Oct 2010
Date Written: January 10, 2010
Despite the extensive literature on cross-sectional aspects of momentum, time-variation in momentum profitability receives little attention. We present a comprehensive examination of the time-series predictability of momentum profits. We uncover a list of intriguing features of time-variation in momentum profits: (1) market volatility has significant power to forecast momentum payoffs, which is even more robust than that of market state or business cycle variables; (2) the time-series predictability is centered on loser stocks; and (3) the time-series patterns appear to be at odds with the cross-sectional results. These new findings jointly present a tough challenge to existing theories on momentum.
Keywords: Momentum; time-series predictability; market volatility; time-varying sentiment
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