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Momentum Profits and Time-Varying Unsystematic Risk

Author

Listed:
  • Xiafei Li

    (Cass Buisness School, City University (UK))

  • Chris Brooks

    (ICMA Centre, University of Reading)

  • Joelle Miffre

    (EDHEC Business School (France))

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.

Suggested Citation

  • Xiafei Li & Chris Brooks & Joelle Miffre, 2006. "Momentum Profits and Time-Varying Unsystematic Risk," ICMA Centre Discussion Papers in Finance icma-dp2006-09, Henley Business School, University of Reading, revised Sep 2006.
    • Handle: RePEc:rdg:icmadp:icma-dp2006-09
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    More about this item

    Keywords

    Momentrum profits; Common Unsystematic risk GJR-GARCH(1; 1)-M;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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