Cross-sectional factor dynamics and momentum returns

Doron Avramov, Satadru Hore*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

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.

Original languageAmerican English
Pages (from-to)69-96
Number of pages28
JournalJournal of Financial Markets
Volume32
DOIs
StatePublished - 1 Jan 2017

Bibliographical note

Publisher Copyright:
© 2017 Elsevier B.V.

Keywords

  • Bayesian filtering
  • Cross-Sectional dynamics
  • Long-run risk
  • Momentum

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