Momentum Profits and Time-Varying Unsystematic Risk

Xiafei Li, Chris Brooks and Joelle Miffre
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Xiafei Li: Cass Buisness School, City University (UK)
Joelle Miffre: EDHEC Business School (France)

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: This study assesses whether the widely documented momentum profits can be ascribed to time-varying risk as described by a GJR-GARCH(1,1)-M model. Consistent with rational pricing in efficient markets, we reveal that momentum profits are a compensation for time-varying unsystematic risks, common to the winner and loser stocks. We also find that, because losers have a higher propensity than winners of disclose bad news, negative return shocks increase their volatility more than it increases that of the winners. The volatility of the losers is also found to respond to news more slowly, but eventually to a greater extent, than that of the winners. Following Hong et al. (2000), we interpret this as a sign that managers of loser firms are reluctant to disclosing bad news, while managers of winner firms are eager to releasing good news.

Keywords: Momentrum profits; Common Unsystematic risk GJR-GARCH(1; 1)-M (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: 25 Pages
Date: 2006-08, Revised 2006-09
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Forthcoming in Journal of Banking and Finance

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Journal Article: Momentum profits and time-varying unsystematic risk (2008)
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