Momentum Effect as Part of a Market Equilibrium

Seung Mo Choi and Hwagyun Kim ()

Journal of Financial and Quantitative Analysis, 2014, vol. 49, issue 1, 107-130

Abstract: Does the momentum effect arise naturally from the determination of asset prices in market equilibrium? We calibrate a standard endowment model of multiple assets under recursive preferences. The momentum effect partly comes from investors’ aversion to consumption risks. An unexpected dividend increase generates a positive return and increases the asset’s proportion of consumption, raising the correlation between its future dividend growth and consumption growth. This is compensated by a higher expected return, generating the momentum effect. The cross-sectional difference in expected returns is also a key contributor. The quantified model produces sizable momentum profits, often close to the observed profits.

Date: 2014
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