Cross-Sectional Factor Dynamics and Momentum Returns

59 Pages Posted: 7 Sep 2017

See all articles by Doron Avramov

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah

Satadru Hore

Federal Reserve Bank of Boston

Multiple version iconThere are 2 versions of this paper

Date Written: 2015-10-22

Abstract

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

Avramov, Doron and Hore, Satadru, Cross-Sectional Factor Dynamics and Momentum Returns (2015-10-22). FRB Boston Risk and Policy Analysis Unit Paper No. RPA 15-2. Available at SSRN: https://ssrn.com/abstract=3033349

Doron Avramov (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Satadru Hore

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02116
United States

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