A Neoclassical Interpretation of Momentum

29 Pages Posted: 16 Oct 2014 Last revised: 13 Nov 2014

See all articles by Laura Xiaolei Liu

Laura Xiaolei Liu

Guanghua School of Management, Peking University

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Date Written: July 1, 2014

Abstract

The neoclassical theory of investment implies that expected stock returns are tied with the expected marginal benefit of investment divided by the marginal cost of investment. Winners have higher expected growth and expected marginal productivity (two major components of the marginal benefit of investment), and earn higher expected stock returns than losers. The investment model succeeds in capturing average momentum profits, reversal of momentum in long horizons, long-run risks in momentum, and the interaction of momentum with several firm characteristics. However, the model fails to reproduce the procyclicality of momentum as well as its negative interaction with book-to-market equity.

Keywords: q-theory, price momentum, earnings momentum, GMM, expected investment growth

JEL Classification: G12, G14

Suggested Citation

Liu, Laura Xiaolei and Zhang, Lu, A Neoclassical Interpretation of Momentum (July 1, 2014). Journal of Monetary Economics, Vol. 67, 2014. Available at SSRN: https://ssrn.com/abstract=2510159

Laura Xiaolei Liu

Guanghua School of Management, Peking University ( email )

Peking University
Beijing, Beijing 100871
China

HOME PAGE: http://www.pku.edu.lauraliu.cn/en-home.html

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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