Momentum Profits and Time-Varying Unsystematic Risk
29 Pages Posted: 1 Sep 2006 Last revised: 10 Nov 2015
Date Written: February 26, 2007
This study assesses whether the widely documented momentum profits can be ascribed to time-varying risk as described by a GJR-GARCH(1,1)-M model. Consistent with rational pricing in efficient markets, we reveal that momentum profits are a compensation for time-varying unsystematic risks, common to the winner and loser stocks. We also find that, because losers have a higher propensity than winners of disclose bad news, negative return shocks increase their volatility more than it increases that of the winners. The volatility of the losers is also found to respond to news more slowly, but eventually to a greater extent, than that of the winners. Following Hong et al. (2000), we interpret this as a sign that managers of loser firms are reluctant to disclosing bad news, while managers of winner firms are eager to releasing good news.
Keywords: Momentum profits, Common unsystematic risk, GJR-GARCH(1,1)-M
JEL Classification: G12, G14
Suggested Citation: Suggested Citation