Earnings and Price Momentum

Posted: 2 Jun 2005

See all articles by Tarun Chordia

Tarun Chordia

Emory University - Department of Finance

Lakshmanan Shivakumar

London Business School

Multiple version iconThere are 2 versions of this paper

Abstract

This paper examines whether earnings momentum and price momentum are related. Both, in time-series as well as in cross-sectional asset pricing tests we find that price momentum is captured by the systematic component of earnings momentum. In time-series as well as in cross-sectional asset pricing tests, the predictive power of past returns is subsumed by a zero investment portfolio, PMN, that is long on stocks with high earnings surprises and short on stocks with low earnings surprises. Further, returns to the earnings-based zero investment portfolio are significantly related to future macroeconomic activities, including growth in GDP, industrial production, consumption, labor income, inflation and T-bill returns. Our results have implications for the Carhart four-factor model and suggest that the price-momentum factor in the Carhart model is merely a noisy proxy for the earnings-momentum based hedge portfolio, PMN.

Keywords: Momentum, post-earnings-announcement-drift, factors

JEL Classification: G12, G14, M41

Suggested Citation

Chordia, Tarun and Shivakumar, Lakshmanan, Earnings and Price Momentum. Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=734084

Tarun Chordia (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Lakshmanan Shivakumar

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

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