Earnings and Price Momentum
Posted: 2 Jun 2005
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
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