Momentum and Funding Conditions
56 Pages Posted: 4 Mar 2015 Last revised: 9 Feb 2016
Date Written: August 1, 2015
We find strong evidence linking the momentum pattern in equity returns with a prominent measure of macroeconomic conditions, specifically the funding environment. We show that the size and consistency of the momentum premium varies systematically across funding states. Furthermore, we find evidence that the relationship between momentum returns and firm characteristics (documented in previous research) is conditional on the funding environment. After controlling for the funding state, we find that the importance of market states and return dispersion disappears. Additionally, funding conditions appear to contain incremental information about the momentum premium even after adjusting for the influence of market states and return dispersion. Overall our results are consistent with the conjecture that transitions in the funding environment encourage investors to revise their portfolio allocations; this reallocation produces inter-temporal variation in the momentum return pattern.
Keywords: Momentum, Funding Conditions, Asset Prices
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