What Explains Price Momentum and 52-Week High Momentum When They Really Work?

67 Pages Posted: 30 Nov 2020 Last revised: 22 Jun 2021

See all articles by Pedro Barroso

Pedro Barroso

CATÓLICA-LISBON School of Business & Economics

Haoxu Wang

UNSW Business School

Date Written: February 2, 2021

Abstract

After long being one of the main puzzles in asset pricing, momentum has ironically became a case of observational equivalence. It can now be explained both by factors proxying for mispricing and by the risk-based q-factor theory. On top of this, q-factor theory also explains the related 52-week-high anomaly. We note that all these recent tests are unconditional exercises while the bulk of momentum profits are predictable and occur after periods of low-volatility. Comparing asset pricing models conditionally, when the strategies actually work, we find the unconditional fit is misleading. The models fit well most of the time but not when the profits are produced. Noticeably, q-theory implies time-varying loadings that are generally inconsistent with the data. We proxy underreaction more directly with earnings announcement returns and analyst forecast errors and find that it markedly decreases with volatility. This supports an underreaction channel as closer to the heart of both anomalies.

Keywords: Conditional Asset Pricing; Momentum; 52-Week High; Investor Underreaction; Investment CAPM; Momentum Risk; Market States

JEL Classification: G11; G12

Suggested Citation

Barroso, Pedro and Wang, Haoxu, What Explains Price Momentum and 52-Week High Momentum When They Really Work? (February 2, 2021). Available at SSRN: https://ssrn.com/abstract=3716786 or http://dx.doi.org/10.2139/ssrn.3716786

Pedro Barroso

CATÓLICA-LISBON School of Business & Economics ( email )

Palma de Cima
Lisbon, Lisboa 1649-023
Portugal

HOME PAGE: http://https://clsbe.lisboa.ucp.pt/person/pedro-monteiro-e-silva-barroso

Haoxu Wang (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

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