Investment-Based Momentum Profits

Laura Xiaolei Liu and Lu Zhang ()
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Laura Xiaolei Liu: Hong Kong University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We offer an investment-based explanation of momentum. The neoclassical theory of investment implies that expected stock returns are related to expected investment returns, defined as the next-period marginal benefits of investment divided by the current-period marginal costs of investment. Empirically, winners have higher expected growth of investment-to-capital and higher expected marginal product of capital and consequently higher expected stock returns than losers. The investment-based expected return model captures well the momentum profits across a wide array of momentum portfolios. However, the individual alphas for several testing portfolios are large. All in all, we conclude that momentum is consistent with the value maximization of firms.

Date: 2010-09
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2010-17

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