43 Pages Posted: 19 May 2006
Date Written: August 2006
This paper uses the dynamic principal component method to estimate a dynamic factor model for stock returns and identify the source of momentum profits. We find that momentum is a systematic-return phenomenon - momentum profits are primarily due to stock return response to a small number of dynamic systematic factors, and the contribution by the idiosyncratic component of stock return is statistically insignificant. We also find that the estimated dynamic factors can be partially related to observed economic factors.
Keywords: momentum, dynamic principal component
JEL Classification: G12
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