What Explains Price Momentum and 52-Week High Momentum When They Really Work?
67 Pages Posted: 30 Nov 2020 Last revised: 22 Jun 2021
Date Written: February 2, 2021
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: Suggested Citation