Download this Paper Open PDF in Browser

Momentum and Aggregate Default Risk

62 Pages Posted: 15 May 2012  

Arvind Mahajan

Texas A&M University - Department of Finance

Alex Petkevich

The University of Toledo - Department of Finance

Ralitsa Petkova

Case Western Reserve University - Department of Banking & Finance

Date Written: May 6, 2012

Abstract

In this paper, we explain momentum profits using innovations in aggregate economy-wide default risk. First, we show that momentum returns are positive only during high default shocks and nonexistent otherwise. Second, we present evidence suggesting that a conditional default shock factor is priced in the cross-section and can explain a large portion of the total momentum returns. According to our results, winners have potentially higher risk than losers during periods of high default shocks. We confirm this finding in alternate sub-periods where momentum is generally not observed and as well as in international data. We also provide an explanation for this finding by linking momentum profits to potential shareholder recovery during financial distress. We find that winners tend to have relatively higher risk in worsening aggregate default conditions due to lower shareholder bargaining power. These results indicate that momentum profits contain a systematic component related to aggregate default and can be explained in a rational framework.

Keywords: Momentum, Aggregate Default Shocks, Shareholder Bargaining Power

JEL Classification: G11, G12

Suggested Citation

Mahajan, Arvind and Petkevich, Alex and Petkova, Ralitsa, Momentum and Aggregate Default Risk (May 6, 2012). Mays Business School Research Paper No. 2012-39. Available at SSRN: https://ssrn.com/abstract=2054707 or http://dx.doi.org/10.2139/ssrn.2054707

Arvind Mahajan (Contact Author)

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-845-4876 (Phone)

Alex Petkevich

The University of Toledo - Department of Finance ( email )

2801 W. BANCROFT ST.
Mail Stop 103
Toledo, OH Ohio 43606
United States

HOME PAGE: http://homepages.utoledo.edu/apetkev

Ralitsa Petkova

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Paper statistics

Downloads
377
Rank
64,337
Abstract Views
1,708