Does the Investment Model Explain Value and Momentum Simultaneously?
62 Pages Posted: 9 Oct 2017
Date Written: October 2017
Two innovations in the structural investment model go a long way in explaining value and momentum jointly. Firm-level investment returns are constructed from firm-level accounting variables, and are then aggregated to the portfolio level to match with portfolio-level stock returns. In addition, current assets form a separate production input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums jointly, and partially explains the positive stock-investment return correlations, the procyclicality and short-term dynamics of the momentum and profitability premiums, and the countercyclicality and long-term dynamics of the value and investment premiums. However, the model fails to explain momentum crashes.
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