Does the Financial Distress Factor Drive the Momentum Anomaly?

37 Pages Posted: 5 Mar 2005

See all articles by Vineet Agarwal

Vineet Agarwal

Cranfield University - School of Management

Richard Taffler

Manchester Business School

Date Written: February 28, 2005

Abstract

This paper brings together the evidence on two asset pricing anomalies - continuation of prior returns (momentum) and the market pricing of distressed firms. Our empirical analysis demonstrates both these effects are driven by market underreaction to bad news, and that momentum is largely subsumed by our distress risk factor. We also extend the extant literature on the market pricing of distress risk by considering this conditional on market state and GDP growth rate, and find little evidence that financial distress risk is a priced risk factor.

Keywords: Asset pricing, risk factor, momentum, market classification

JEL Classification: G10, G12

Suggested Citation

Agarwal, Vineet and Taffler, Richard J., Does the Financial Distress Factor Drive the Momentum Anomaly? (February 28, 2005). Available at SSRN: https://ssrn.com/abstract=676667 or http://dx.doi.org/10.2139/ssrn.676667

Vineet Agarwal (Contact Author)

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom
00 44 (0) 1234 754543 (Phone)
00 44 (0) 1234 752554 (Fax)

Richard J. Taffler

Manchester Business School ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

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