Momentum Effect as Part of a Market Equilibrium
41 Pages Posted: 9 Sep 2012 Last revised: 18 Dec 2012
Date Written: August 28, 2012
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: Suggested Citation