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Risk adjustment and momentum sources |
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| Authors: | Jun Wang |
| Institution: | a Quantitative Analytics, Standard and Poor’s, New York, NY 10041, USA b Rutgers Business School - Newark and New Brunswick, Rutgers University, USA c Chinese Academy of Finance and Development, Central University of Finance and Economics, Beijing, China |
| Abstract: | We show that the conventional procedure of risk adjustment by running full-sample time-series Fama-French three-factor regressions is not appropriate for momentum portfolios because the procedure fails to allow for the systematic dynamics of momentum portfolio factor loadings. We propose a simple procedure to adjust risks associated with the Fama-French three factors for momentum portfolios. Using our proposed method, the Fama-French three factors can explain approximately 40% of momentum profits generated by individual stocks and nearly all of momentum returns from style portfolios. |
| Keywords: | G10 G11 G12 |
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