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Cross-sectional factor dynamics and momentum returns

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  • Avramov, Doron
  • Hore, Satadru

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.

Suggested Citation

  • Avramov, Doron & Hore, Satadru, 2017. "Cross-sectional factor dynamics and momentum returns," Journal of Financial Markets, Elsevier, vol. 32(C), pages 69-96.
    • Handle: RePEc:eee:finmar:v:32:y:2017:i:c:p:69-96
    DOI: 10.1016/j.finmar.2017.01.001
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    Cited by:

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    2. Ming Gu & Minxing Sun & Yangru Wu & Weike Xu, 2021. "Economic policy uncertainty and momentum," Financial Management, Financial Management Association International, vol. 50(1), pages 237-259, March.

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    More about this item

    Keywords

    Momentum; Cross-Sectional dynamics; Long-run risk; Bayesian filtering;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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