Dynamic Factors and the Source of Momentum Profits
University of Iowa - Henry B. Tippie College of Business
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.
Number of Pages in PDF File: 43
Keywords: momentum, dynamic principal component
JEL Classification: G12
Date posted: May 19, 2006