Economic Activity and Momentum Profits: Further Evidence
40 Pages Posted: 29 Apr 2013 Last revised: 19 Feb 2018
Date Written: February 16, 2018
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: Suggested Citation