Does the Investment Model Explain Value and Momentum Simultaneously?

62 Pages Posted: 9 Oct 2017

See all articles by Andrei Gonçalves

Andrei Gonçalves

University of North Carolina (UNC) at Chapel Hill - Finance Area

Chen Xue

University of Cincinnati

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2017

Abstract

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.

Suggested Citation

Gonçalves, Andrei and Xue, Chen and Zhang, Lu, Does the Investment Model Explain Value and Momentum Simultaneously? (October 2017). NBER Working Paper No. w23910. Available at SSRN: https://ssrn.com/abstract=3049734

Andrei Gonçalves (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Chen Xue

University of Cincinnati ( email )

College of Business Administration
Cincinnati, OH 45221
United States
(513) 556-7078 (Phone)

Lu Zhang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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