Market Risk and the Momentum Mystery
39 Pages Posted: 21 Nov 2018 Last revised: 9 Feb 2019
Date Written: February 7, 2019
This paper employs the ZCAPM asset pricing model of Liu, Kolari, and Huang (2018) to show that momentum returns are highly related to market risk arising from return dispersion (RD). Cross-sectional tests show that momentum risk loadings and RD risk loadings are similarly priced in momentum portfolios. Comparative analyses find that zero-investment momentum portfolios and zero-investment return dispersion portfolios earn high returns relative to other risk factors. Further regression tests indicate that zero-investment momentum returns are very significantly related to zero-investment return dispersion returns. We conclude that the momentum mystery is explained by market risk associated with return dispersion for the most part.
Keywords: momentum, market risk, return dispersion, asset pricing
JEL Classification: C20, C30, G12, G19
Suggested Citation: Suggested Citation