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Cross-sectional factor dynamics and momentum returns

Doron Avramov and Satadru Hore

Journal of Financial Markets, 2017, vol. 32, issue C, 69-96

Abstract: We develop a structural model where joint dynamics of aggregate consumption and asset-specific dividends are governed by correlated state variables. The correlation structure implies distinct cross-sectional exposures of dividends to a long history of consumption growth rates, resulting in variation of consumption beta. Such variation rationalizes momentum crashes per Daniel and Moskowitz (2016), as the consumption beta of the Winner portfolios remain low after the economy recovers from a downturn, while the consumption beta of the Loser portfolios grow quickly. Thus, emerging from a recession, the consumption beta of the momentum strategy decreases, and so does risk premia.

Keywords: Momentum; Cross-Sectional dynamics; Long-run risk; Bayesian filtering (search for similar items in EconPapers)
JEL-codes: G12 C32 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:finmar:v:32:y:2017:i:c:p:69-96