Value, Momentum and Market Timing

Abstract

We study firm-level characteristics that a manager would employ as signalling tools in order to time the market (i.e. repurchases and issues). Following the market timing framework, we develop a two-factor asset pricing model comprising a “market” and a “mispricing” factor, which is able to capture the cross-sectional variation of value and momentum. Specifically, loser (undervalued) portfolios provide a premium when market timing succeeds while winner (overvalued) portfolios provide a hedge under bad states of the world when market timing fails. The two factors contain important information regarding the time-variation of the strategies providing a unique explanation for momentum crashes.

Keywords: Value, Momentum, Market-timing, Asset Pricing.

JEL Classification: G11, G12, G14, G32.