A Critique of Momentum Anomalies

47 Pages Posted: 28 Aug 2018 Last revised: 29 Sep 2020

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

University of Southern Denmark; Danish Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: September 28, 2020

Abstract

This paper is the second in a series of critiques of the assumption that stable economic relations exist between certain "firm characteristics" and expected returns. The paper explains why this is not the case for past returns and provides theoretical, empirical, and simulated evidence that the stylized facts involving momentum are consistent with traditional risk-based asset pricing, thereby solving the apparent theoretical puzzle. For example, riskier assets tend to be in the loser portfolio after (large) increases in the price of risk: The time-varying correlation between past returns and risk, which determines the risk of momentum portfolios, decreases with the price of risk. Hence, their premiums are approximately negative quadratic functions of the price of risk, theoretically truncated at zero. The best linear (CAPM) function describing this relation unconditionally has the negative slope and positive intercept documented empirically and considered the main momentum puzzle.

Keywords: momentum, risk, puzzle, ranking, conditional

JEL Classification: G11, G12, G14

Suggested Citation

de Oliveira Souza, Thiago, A Critique of Momentum Anomalies (September 28, 2020). Available at SSRN: https://ssrn.com/abstract=3228116 or http://dx.doi.org/10.2139/ssrn.3228116

Thiago De Oliveira Souza (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Danish Finance Institute ( email )

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