What Explains Price Momentum and 52-Week High Momentum When They Really Work?
62 Pages Posted: 30 Nov 2020 Last revised: 28 Nov 2022
Date Written: February 2, 2021
Abstract
After long being one of the main puzzles in asset pricing, momentum has ironically become a case of observational equivalence. It can now be explained both by behavioral factors capturing mispricing and by the neoclassical-inspired investment q-factors. On top of this, q-factors also explain the related 52-week-high anomaly. We note that recent tests subsuming both anomalies are unconditional exercises while the bulk of momentum profits are predictable and occur in bull markets and 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 not consistent with the data. On the other hand, consistent with an underreaction channel, earnings announcement returns and analyst forecast errors both decrease steeply with lagged volatility.
Keywords: Conditional Asset Pricing; Momentum; 52-Week High; Investor Underreaction; Investment CAPM; Momentum Risk; Market States
JEL Classification: G11; G12
Suggested Citation: Suggested Citation