Cross-Sectional Factor Dynamics and Momentum Returns
59 Pages Posted: 7 Sep 2017 Last revised: 18 Mar 2022
Date Written: October, 2015
This paper proposes and implements an inter-temporal model wherein aggregate consumption and asset-specific dividend growths jointly move with two mean-reverting state variables. Consumption beta varies through time and cross sectionally due to variation in half-lives and stationary volatilities of the dividend signals. Winner (Loser) stocks exhibit high (low) half-lives and stationary volatilities, and thus exhibit high (low) consumption beta commanding high (low) risk-premium. The model also rationalizes the \"momentum crashes\" phenomenon discussed in Daniel and Moskowitz (2014). High half-lives of dividend signals in Winners keep their consumption betas low long after recovering from a prolonged economic downturn, while low half-lives in Losers make their consumption betas grow rather quickly. Thus, coming out of a recession, the long Winner/short Loser strategy reduces in consumption beta and, hence, risk-premia.
Keywords: Momentum, Cross-Sectional Dynamics, Long-Run Risk, Bayesian Filtering
JEL Classification: C32, G12
Suggested Citation: Suggested Citation