Understanding the nature of the risks and the source of the rewards to momentum investing |
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Authors: | Grundy BD; Martin JS |
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Institution: | Melbourne Business School, University of Melbourne, Carlton, VIC 3053, Australia
E-mail: b.grundy@mbs.unimelb.edu.au
1 Arizona State University, AZ, USA
E-mail: Spencer.Martin@asu.edu
z Corresponding author |
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Abstract: | Buying recent winners and shorting recent losers guaranteestime-varying factor exposures in accordance with the performanceof common risk factors during the ranking period. Adjusted forthis dynamic risk exposure, momentum profits are remarkablystable across subperiods of the entire post-1926 era. Factormodels can explain 95% of winner or loser return variability,but cannot explain their mean return components are more profitablethan those based on total returns. Neither industry effectsnor cross-sectional differences in expected returns are theprimary cause of the momentum phenomenon. |
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