Economic Activity and Momentum Profits: Further Evidence

40 Pages Posted: 29 Apr 2013 Last revised: 19 Feb 2018

See all articles by Paulo F. Maio

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Dennis Philip

Durham University - Department of Economics and Finance

Date Written: February 16, 2018

Abstract

We show that economic activity plays an important role in explaining momentum-based anomalies. A simple two-factor model containing the market and alternative indicators of economic activity as risk factors---industrial production, capacity utilization rate, retail sales, and a broad economic index---offers considerable explanatory power for the cross-section of price and industry momentum portfolios. Hence past winners enjoy higher average returns than past losers because they have larger macroeconomic risk. The model compares favorably with popular multifactor models used in the literature. Moreover, our model is consistent with Merton's Intertemporal CAPM framework, since the macro variables forecast stock market volatility and future economic activity.

Keywords: momentum; industry momentum; asset pricing; cross-section of stock returns; Intertemporal CAPM; macro risk factors; linear multifactor models; predictability of stock returns

JEL Classification: E44, G10, G12

Suggested Citation

Maio, Paulo F. and Philip, Dennis, Economic Activity and Momentum Profits: Further Evidence (February 16, 2018). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2257869 or http://dx.doi.org/10.2139/ssrn.2257869

Paulo F. Maio (Contact Author)

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

Dennis Philip

Durham University - Department of Economics and Finance ( email )

Department of Economics and Finance
Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
416
Abstract Views
2,362
rank
77,452
PlumX Metrics