Momentum, Business Cycle and Time Varying Expected Returns

47 Pages Posted: 24 Nov 2001

See all articles by Tarun Chordia

Tarun Chordia

Emory University - Department of Finance

Lakshmanan Shivakumar

London Business School

Date Written: June 2001

Abstract

In recent years there has been a dramatic growth in academic interest in the predictability of asset returns based on past history. A growing number of researchers argue that time-series patterns in returns are due to investor irrationality, and thus can be translated into abnormal profits. Continuation of short-term returns or momentum is one such pattern that has defied any rational explanation, and is at odds with market efficiency. This paper argues that profits to momentum strategies are a result of persistent differences in conditionally expected returns, and are consistent with time-varying expected returns. Standard macroeconomic variables are able to predict momentum payoffs, and these payoffs disappear once returns are adjusted for variations in expected returns.

Suggested Citation

Chordia, Tarun and Shivakumar, Lakshmanan, Momentum, Business Cycle and Time Varying Expected Returns (June 2001). London Business School Accounting Subject Area No. 020; AFA 2001. Available at SSRN: https://ssrn.com/abstract=243807 or http://dx.doi.org/10.2139/ssrn.243807

Tarun Chordia (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Lakshmanan Shivakumar

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

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