Cross-Sectional Factor Dynamics and Momentum Returns

Abstract

We develop a structural model where joint dynamics of aggregate consumption and asset-specific dividends are governed by correlated state-variables. The correlation structure implies distinct cross-sectional exposures of dividends to long history of consumption growth rates, resulting in variation of consumption beta. Such variation rationalizes momentum crashes per Daniel and Moskowitz (2015), as Winner's consumption beta remains low after the economy recovers from a downturn, while Loser's consumption beta grows quickly. Emerging from a recession, the momentum strategy thus reduces in consumption beta and risk-premia. Variation in beta also explains tendency of momentum to concentrate in stocks with particular styles.

Keywords: Momentum, Cross-Sectional Dynamics, Long-Run Risk, Bayesian Filtering

JEL Classification: G12, C32