Earnings and Price Momentum

46 Pages Posted: 10 Nov 2002

See all articles by Tarun Chordia

Tarun Chordia

Emory University - Department of Finance

Lakshmanan Shivakumar

London Business School

Multiple version iconThere are 2 versions of this paper

Date Written: May 23, 2005

Abstract

This paper examines whether earnings momentum and price momentum are related. Both in time-series as well as in cross-sectional asset pricing tests, we find that price momentum is captured by the systematic component of earnings momentum. The predictive power of past returns is subsumed by a zero-investment portfolio that is long on stocks with high earnings surprises and short on stocks with low earnings surprises. Further, returns to the earnings-based zero-investment portfolio that is long on stocks with high earnings surprises. Further, returns to the earnings-based zero-investment portfolio are significantly related to future macroeconomic activities, including growth in GDP, industrial production, consumption, labor income, inflation, and T-bill returns. Our results have implications for the Carhart four-factor model and suggest that the price-momentum factor in the Carhart model is merely a noisy proxy for the earnings-momentum based hedge portfolio, PMN.

Keywords: Momentum, earnings momentum, post-earnings-announcement drift

JEL Classification: G11

Suggested Citation

Chordia, Tarun and Shivakumar, Lakshmanan, Earnings and Price Momentum (May 23, 2005). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=342581 or http://dx.doi.org/10.2139/ssrn.342581

Tarun Chordia (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Lakshmanan Shivakumar

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

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