A Model of Momentum

55 Pages Posted: 7 Mar 2011 Last revised: 27 Feb 2012

See all articles by Laura Xiaolei Liu

Laura Xiaolei Liu

Guanghua School of Management, Peking University

Lu Zhang, 张橹

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

Multiple version iconThere are 3 versions of this paper

Date Written: November 13, 2011

Abstract

We offer an investment-based interpretation of price and earnings momentum. The neoclassical theory of investment 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 size, firm age, trading volume, stock return volatility, credit ratings, and book-to-market. However, the model fails to reproduce procyclical momentum profits.

Keywords: Price Momentum, Earnings Momentum, GMM, Expected Growth, Investment

JEL Classification: E22, E44, G12, G14, G31

Suggested Citation

Liu, Laura Xiaolei and Zhang, Lu, A Model of Momentum (November 13, 2011). Available at SSRN: https://ssrn.com/abstract=1779188 or http://dx.doi.org/10.2139/ssrn.1779188

Laura Xiaolei Liu (Contact Author)

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

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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