Economic Fundamentals, Risk, and Momentum Profits

32 Pages Posted: 13 Jan 2004

See all articles by Laura Xiaolei Liu

Laura Xiaolei Liu

Guanghua School of Management, Peking University

Jerold B. Warner

University of Rochester – Simon Business School

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Date Written: January 2004

Abstract

We study empirically the changes in economic fundamentals for firms with recent stock price momentum. We find that: (i) winners have temporarily higher dividend, investment, and sales growth rates, and losers have temporarily lower dividend, investment, and sales growth rates; (ii) the duration of the growth rate dispersion matches approximately that of the momentum profits; (iii) past returns are strong, positive predictors of future growth rates; and (iv) factor-mimicking portfolios on expected growth rates earn significantly positive returns on average. This evidence is consistent with the theoretical predictions of Johnson (2002), in which momentum returns reflect compensation for temporary shifts in risk associated with expected growth. Additional tests do not provide much support for a risk-based explanation, however.

Keywords: Expected Growth, Momentum, Risk, Event Study

JEL Classification: G12, E44

Suggested Citation

Liu, Laura Xiaolei and Warner, Jerold B. and Zhang, Lu, Economic Fundamentals, Risk, and Momentum Profits (January 2004). Simon School Working Paper No. FR 04-03. Available at SSRN: https://ssrn.com/abstract=486362 or http://dx.doi.org/10.2139/ssrn.486362

Laura Xiaolei Liu (Contact Author)

Guanghua School of Management, Peking University ( email )

Peking University
Beijing, Beijing 100871
China

HOME PAGE: http://www.pku.edu.lauraliu.cn/en-home.html

Jerold B. Warner

University of Rochester – Simon Business School ( email )

Carol Simon Hall 3-160H
Rochester, NY 14627
United States
585-275-2678 (Phone)
585-442-6323 (Fax)

Lu Zhang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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