Conditional Asset Pricing and Momentum

Huynh, Thanh; Smith, Daniel R.

doi:10.2139/ssrn.2136754

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Conditional Asset Pricing and Momentum

56 Pages Posted: 28 Aug 2012 Last revised: 4 Dec 2014

See all articles by Thanh Huynh

Thanh Huynh

Monash University - Department of Banking and Finance; Cbus Super Fund

Daniel R. Smith

Queensland University of Technology - School of Economics and Finance; Simon Fraser University; Financial Research Network (FIRN)

Date Written: August 5, 2014

Abstract

Winner stocks have higher risk exposure to Fama and French's (1993) three factors (FF3F) than loser stocks during good economic times, and therefore should earn higher expected returns. Employing the conditional FF3F model to risk adjust returns on winner and loser stocks can reduce the average momentum alpha by 50\% compared to the conventional portfolio-level estimate. We point out a bias in the existing methodology of component-level risk adjustment. After correcting for this bias, even though conditional asset pricing models still cannot completely explain momentum returns, the reduction in alpha remains strong.

Keywords: momentum, component-level risk adjustment, sample selection bias

JEL Classification: G12

Suggested Citation: Suggested Citation

Huynh, Thanh D. and Smith, Daniel Robert, Conditional Asset Pricing and Momentum (August 5, 2014). Available at SSRN: https://ssrn.com/abstract=2136754 or http://dx.doi.org/10.2139/ssrn.2136754