What Drives the Enhanced Momentum Profits of Growth Firms? Mispricing or Risk

39 Pages Posted: 22 Mar 2011 Last revised: 27 Apr 2014

See all articles by Umut Celiker

Umut Celiker

Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law

Raman Kumar

Virginia Polytechnic Institute & State University - Pamplin College of Business

Date Written: May 17, 2013

Abstract

We examine rational and behavioral explanations for the relatively larger momentum profits of growth firms. Our results provide support for the rational explanation for firms with low idiosyncratic volatility, and are consistent with the notion that growth options cause a wider spread in the risk and returns between winners and losers. However, the evidence is more aligned with the behavioral explanation for firms with high idiosyncratic volatility, which is consistent with the notion that investors are more prone to behavioral biases in the presence of idiosyncratic volatility, and the resulting mispricings are less likely to be immediately arbitraged away.

Keywords: Momentum, Growth options, Idiosyncratic volatility, Market-to-book ratio, Systematic risk

JEL Classification: G12, G14

Suggested Citation

Celiker, Umut and Kumar, Raman, What Drives the Enhanced Momentum Profits of Growth Firms? Mispricing or Risk (May 17, 2013). Available at SSRN: https://ssrn.com/abstract=1786148 or http://dx.doi.org/10.2139/ssrn.1786148

Umut Celiker (Contact Author)

Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

Raman Kumar

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

Dept. of Finance, Pamplin 2126
Blacksburg, VA 24061
United States
540-231-5700 (Phone)
540-231-3155 (Fax)

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