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Is default risk the hidden factor in momentum returns? Some empirical results

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  • Isabel Abinzano
  • Luis Muga
  • Rafael Santamaria
  • Henk Berkman

Abstract

type="main" xml:id="acfi12021-abs-0001" xml:lang="en"> This paper analyzes the role of default risk in the momentum effect focusing on data from four developed European stock markets (France, Germany, Spain and the United Kingdom). Using a market-based measure of default risk, we show that it is not the hidden factor behind this effect. While the loser portfolio is characterized by high default risk, small size, high book-to-market and illiquidity, characterization of the winner portfolio is somewhat more complex. Given that the momentum strategy is the return differential between the winners and the losers, factors such as the stock market cycle or the evolution of momentum portfolios against their reference point make momentum profits difficult to forecast.

Suggested Citation

  • Isabel Abinzano & Luis Muga & Rafael Santamaria & Henk Berkman, 2014. "Is default risk the hidden factor in momentum returns? Some empirical results," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(3), pages 671-698, September.
    • Handle: RePEc:bla:acctfi:v:54:y:2014:i:3:p:671-698
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    File URL: http://hdl.handle.net/10.1111/acfi.2014.54.issue-3
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    Cited by:

    1. González-Urteaga, Ana & Muga, Luis & Santamaria, Rafael, 2015. "Momentum and default risk. Some results using the jump component," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 185-193.
    2. Abinzano, Isabel & Gonzalez-Urteaga, Ana & Muga, Luis & Sanchez, Santiago, 2020. "Performance of default-risk measures: the sample matters," Journal of Banking & Finance, Elsevier, vol. 120(C).
    3. Abinzano, Isabel & Corredor, Pilar & Mansilla-Fernández, José Manuel, 2022. "Sovereign debt holdings and banks’ credit risk: Evidence from the Eurozone," Finance Research Letters, Elsevier, vol. 47(PA).
    4. Isabel Abinzano & Pilar Corredor & Beatriz Martinez, 2021. "Does family ownership always reduce default risk?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4025-4060, September.
    5. Abinzano, Isabel & Martinez, Beatriz & Poletti-Hughes, Jannine, 2023. "Women in power with power: The influence of meaningful board representation on default risk," International Review of Financial Analysis, Elsevier, vol. 89(C).

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