A Critique of Momentum Anomalies

Discussion Papers on Business and Economics, University of Southern Denmark, Forthcoming

51 Pages Posted: 16 Mar 2019

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: February 15, 2019

Abstract

This paper offers theoretical, empirical, and simulated evidence that momentum regularities in asset prices are not anomalies. Within a general, frictionless, rational expectations, risk-based asset pricing framework, riskier assets tend to be in the loser portfolios after (large) increases in the price of risk. Hence, the risk of momentum portfolios usually decreases with the prevailing price of risk, and their risk premiums are approximately negative quadratic functions of the price of risk (and the market premium) theoretically truncated at zero. The best linear (CAPM) function describing this relation unconditionally has exactly the negative slope and positive intercept documented empirically.

Keywords: Momentum, Risk, Puzzle, Ranking, Conditional

JEL Classification: G11, G12, G14

Suggested Citation

de Oliveira Souza, Thiago, A Critique of Momentum Anomalies (February 15, 2019). Discussion Papers on Business and Economics, University of Southern Denmark, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3341275 or http://dx.doi.org/10.2139/ssrn.3341275

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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