Momentum Profits and Time-Varying Unsystematic Risk

29 Pages Posted: 1 Sep 2006 Last revised: 10 Nov 2015

See all articles by Xiafei Li

Xiafei Li

Nottingham University Business School

Joëlle Miffre

Audencia Nantes School of Management; Audencia Business School

Chris Brooks

University of Reading - ICMA Centre

Multiple version iconThere are 2 versions of this paper

Date Written: February 26, 2007

Abstract

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

Li, Xiafei and Miffre, Joelle and Brooks, Chris, Momentum Profits and Time-Varying Unsystematic Risk (February 26, 2007). Journal of Banking and Finance, Vol. 32, No. 4, 2008. Available at SSRN: https://ssrn.com/abstract=927772 or http://dx.doi.org/10.2139/ssrn.927772

Xiafei Li

Nottingham University Business School ( email )

Jubilee Campus
Nottingham, NG8 1BB
United Kingdom
+44 (0)115 9518603 (Phone)

Joelle Miffre (Contact Author)

Audencia Nantes School of Management ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

Chris Brooks

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)

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