A Model of Momentum

Charles A. Dice Center Working Paper No. 2010-17

Fisher College of Business Working Paper No. 2010-03-17

40 Pages Posted: 27 Sep 2010 Last revised: 17 Jun 2011

Laura Xiaolei Liu

Guanghua School of Management, Peking University

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2011

Abstract

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

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

Laura Xiaolei Liu

Guanghua School of Management, Peking University ( email )

Peking University
Beijing, Beijing 100871
China

HOME PAGE: http://www.pku.edu.lauraliu.cn/en-home.html

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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