Momentum, Business Cycle and Time Varying Expected Returns
47 Pages Posted: 24 Nov 2001
Date Written: June 2001
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: Suggested Citation