A Unified Framework for Value and Momentum

Abstract

A simple unifying present value framework provides an understanding for value and momentum effects in asset prices. Through the present value formula, valuation ratios adjusted for expected future earnings growth provide estimates of expected returns. We argue and show that momentum is a reasonable proxy for growth. Momentum forecasts future earnings growth, significantly improves value's forecast for expected returns, and is drowned out when accounting for future realized growth. Extending the analysis to more general earnings growth models, we construct theoretically-motivated single factor models based on growth-adjusted value that price the cross-section of assets well relative to popular multifactor models.