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Momentum profits, nonnormality risks and the business cycle

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  • Ana-Maria Fuertes
  • Joëlle Miffre
  • Wooi-Hou Tan

Abstract

This article examines the role of nonnormality risks in explaining the momentum puzzle of equity returns. It shows that momentum profits are not normally distributed and, relatedly, that the momentum profitability is partly a compensation for systematic negative skewness risk in line with market efficiency. This finding is pervasive across nine trading strategies that combine different holding and ranking periods and is reinforced when time dependencies in abnormal returns and risks are explicitly modelled. The analysis also reveals that the market and skewness risks of momentum portfolios evolve over the business cycle in a manner that is consistent with market timing and risk aversion. While nonnormality risks matter, a large proportion of the momentum profits remains unexplained which may provide comfort to behavioural theorists.

Suggested Citation

  • Ana-Maria Fuertes & Joëlle Miffre & Wooi-Hou Tan, 2009. "Momentum profits, nonnormality risks and the business cycle," Applied Financial Economics, Taylor & Francis Journals, vol. 19(12), pages 935-953.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:12:p:935-953
    DOI: 10.1080/09603100802167304
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    References listed on IDEAS

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    Cited by:

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    2. Lee, King Fuei, 2023. "Aging Population and its Effects on Long-Horizon Momentum Profits," MPRA Paper 120931, University Library of Munich, Germany.
    3. Xiaoyue Chen & Bin Li & Andrew C. Worthington, 2022. "Realised volatility and industry momentum returns," Palgrave Communications, Palgrave Macmillan, vol. 9(1), pages 1-12, December.
    4. Tim Herberger & Daniel Kohlert & Andreas Oehler, 2011. "Momentum and industry-dependence: An analysis of the Swiss stock market," Journal of Asset Management, Palgrave Macmillan, vol. 11(6), pages 391-400, February.
    5. Mauricio Cervantes & Miguel Ángel Montoya & L. Arturo Bernal Ponce, 2016. "Effect of the Business Cycle on Investment Strategies: Evidence from Mexico," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 11(2), pages 39-49, Julio-Sep.
    6. Bohl, Martin T. & Czaja, Marc-Gregor & Kaufmann, Philipp, 2016. "Momentum profits, market cycles, and rebounds: Evidence from Germany," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 139-159.
    7. Tim A. Herberger & Matthias Horn & Andreas Oehler, 2020. "Are intraday reversal and momentum trading strategies feasible? An analysis for German blue chip stocks," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(2), pages 179-197, June.

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