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Dynamic Factors and the Source of Momentum Profits

43 Pages Posted: 19 May 2006  

Tong Yao

University of Iowa - Henry B. Tippie College of Business

Date Written: August 2006

Abstract

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

Suggested Citation

Yao, Tong, Dynamic Factors and the Source of Momentum Profits (August 2006). Available at SSRN: https://ssrn.com/abstract=903280 or http://dx.doi.org/10.2139/ssrn.903280

Tong Yao (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

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5020 Main Library
Iowa City, IA 52242-1000
United States

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