RFS Advance Access published online on October 2, 2008
Review of Financial Studies, doi:10.1093/rfs/hhn090
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Momentum Profits, Factor Pricing, and Macroeconomic Risk
Hong Kong University of Science and Technology
University of Michigan and NBER
Send correspondence to Lu Zhang, Finance Department, Stephen M. Ross School of Business, University of Michigan, 701 Tappan, ER 7605 Bus Ad, Ann Arbor, MI 48109-1234; telephone: (734) 615-4854; fax: (734) 936-0282. E-mail: zhanglu{at}bus.umich.edu.
JEL Classification: G12, E44
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Abstract |
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Recent winners have temporarily higher loadings than recent losers on the growth rate of industrial production. The loading spread derives mostly from the positive loadings of winners. The growth rate of industrial production is a priced risk factor in standard asset pricing tests. In many specifications, this macroeconomic risk factor explains more than half of momentum profits. We conclude that risk plays an important role in driving momentum profits.
We acknowledge helpful comments from Mike Barclay, Du Du, Cam Harvey, Liang Hu, Gautam Kaul, Spencer Martin (WFA discussant), Bill Schwert, Matt Spiegel (editor), Mungo Wilson, anonymous referees, and seminar participants at Michigan State University, University of California at Berkeley, University of Illinois at Urbana-Champaign, University of Rochester, Midwest Finance Association Meetings, Southwestern Finance Association Meetings, Washington Area Finance Association Meetings, Finance Summit I, and Western Finance Association Annual Meetings. We especially thank Jerry Warner for collaboration in earlier drafts. This paper supersedes our working papers previously circulated as "Momentum Profits and Macroeconomic Risk" and "Economic Fundamentals, Risk, and Momentum Profits." All remaining errors are our own.