Fisher College of Business Working Paper No. 2010-03-17
40 Pages Posted: 27 Sep 2010 Last revised: 17 Jun 2011
Date Written: June 2011
Optimal investment of firms implies that expected stock returns are tied with the expected marginal benefit of investment divided by the marginal cost of investment. Winners have higher expected growth and expected marginal productivity (two major components of the marginal benefit of investment), and earn higher expected stock returns than losers. The investment model succeeds in capturing average momentum profits, reversal of momentum in long horizons, as well as the interaction of momentum with market capitalization, firm age, trading volume, and stock return volatility. However, the model fails to reproduce procyclical momentum profits.
Keywords: Momentum Profits, Investment-Based Asset Pricing, GMM, Expected Growth
JEL Classification: E22, E44, G12, G14, G31
Suggested Citation: Suggested Citation
Liu, Laura Xiaolei and Zhang, Lu, A Model of Momentum (June 2011). Charles A. Dice Center Working Paper No. 2010-17. Available at SSRN: https://ssrn.com/abstract=1683385 or http://dx.doi.org/10.2139/ssrn.1683385