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Risks and rewards for momentum and reversal portfolios

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  • Yuming Li

    (California State University)

Abstract

Rational asset pricing implies a positive relation between the expected risk-adjusted return and the volatility of a factor-mimicking portfolio. The relation for the momentum portfolio is weak after its return is adjusted for the risks associated with the market return, the size factor, and the book-to-market factor. However, the relation is significantly positive and captures most of the average return on the momentum portfolio after the return is adjusted for the market return and the risk associated with the short-term reversal portfolio return. The result supports the hypothesis that there is a common factor underlying both momentum and short-term reversal. The dynamics of the factor loadings and the correlation structure of the underlying factors have important implications for the risk prices associated with the factor-mimicking portfolios and the risk–return trade-off for momentum and reversal portfolios.

Suggested Citation

  • Yuming Li, 2017. "Risks and rewards for momentum and reversal portfolios," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(3), pages 289-315, August.
    • Handle: RePEc:kap:fmktpm:v:31:y:2017:i:3:d:10.1007_s11408-017-0293-0
    DOI: 10.1007/s11408-017-0293-0
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    More about this item

    Keywords

    Conditional asset-pricing models; Multivariate GARCH-means model; Factor portfolios; Momentum and reversals;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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