Momentum Effect as Part of a Market Equilibrium

41 Pages Posted: 9 Sep 2012 Last revised: 18 Dec 2012

See all articles by Seung Mo Choi

Seung Mo Choi

International Monetary Fund (IMF)

Hwagyun Kim

Texas A&M University - Mays Business School

Date Written: August 28, 2012

Abstract

Does the momentum effect arise naturally from the determination of asset prices in market equilibrium? We calibrate a standard endowment model of multiple assets under recursive preferences. The momentum effect partly comes from investors' aversion to consumption risks. An unexpected dividend increase generates a positive return and increases the asset's proportion of consumption, raising the correlation between its future dividend growth and consumption growth. This is compensated by a higher expected return, generating the momentum effect. The cross-sectional difference in expected returns is also a key contributor. The quantified model produces sizable momentum profits, often close to the observed profits.

Keywords: Momentum Effect, Asset Pricing

JEL Classification: G12

Suggested Citation

Choi, Seung Mo and Kim, Hwagyun, Momentum Effect as Part of a Market Equilibrium (August 28, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Mays Business School Research Paper No. 2012-80, Available at SSRN: https://ssrn.com/abstract=2143354

Seung Mo Choi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Hwagyun Kim

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4218
United States

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