Risks and rewards for momentum and reversal portfolios

Yuming Li ()
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Yuming Li: California State University

Financial Markets and Portfolio Management, 2017, vol. 31, issue 3, No 2, 289-315

Abstract: Abstract Rational asset pricing implies a positive relation between the expected risk-adjusted return and the volatility of a factor-mimicking portfolio. The relation for the momentum portfolio is weak after its return is adjusted for the risks associated with the market return, the size factor, and the book-to-market factor. However, the relation is significantly positive and captures most of the average return on the momentum portfolio after the return is adjusted for the market return and the risk associated with the short-term reversal portfolio return. The result supports the hypothesis that there is a common factor underlying both momentum and short-term reversal. The dynamics of the factor loadings and the correlation structure of the underlying factors have important implications for the risk prices associated with the factor-mimicking portfolios and the risk–return trade-off for momentum and reversal portfolios.

Keywords: Conditional asset-pricing models; Multivariate GARCH-means model; Factor portfolios; Momentum and reversals (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s11408-017-0293-0

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