Risky Value Meets Behavioral Momentum

59 Pages Posted: 8 Apr 2022 Last revised: 16 Oct 2024

See all articles by Aleksandr Zotov

Aleksandr Zotov

University of Southern California, Marshall School of Business, Finance and Business Economics Department

Date Written: January 10, 2022

Abstract

This paper demonstrates that risk-based and behavioral cross-sectional asset pricing anomalies can plausibly coexist. To this end, I build a model in which risk-based value premium exists along with behavioral momentum. The value premium stems from differential exposures of stocks to rare disaster risk. Momentum is the result of behavioral underreaction to firm-specific news. The model reproduces several key patterns about value and momentum factor returns, including average excess returns, factors' correlation and the failure of CAPM in explaining both anomalies. The model also generates the reversal of momentum returns precisely due to the existence of a persistent value premium. The behavior of value and momentum during market crashes lends support to the model mechanism.

Keywords: mispricing, momentum, rare disasters, value premium

JEL Classification: G12, G40

Suggested Citation

Zotov, Aleksandr, Risky Value Meets Behavioral Momentum (January 10, 2022). Available at SSRN: https://ssrn.com/abstract=4071169 or http://dx.doi.org/10.2139/ssrn.4071169

Aleksandr Zotov (Contact Author)

University of Southern California, Marshall School of Business, Finance and Business Economics Department ( email )

Los Angeles, CA
United States

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