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Momentum Effect as Part of a Market Equilibrium

Published online by Cambridge University Press:  28 April 2014

Seung Mo Choi  and
Hwagyun Kim
Seung Mo Choi
Affiliation:
[email protected], School of Economic Sciences, Washington State University, PO Box 646210, Pullman, WA 99164
Hwagyun Kim
Affiliation:
[email protected], Mays Business School, Texas A&M University, 4218 TAMU, College Station, TX 77843.
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Abstract

Does the momentum effect arise naturally from the determination of asset prices in market equilibrium? We calibrate a standard endowment model of multiple assets under recursive preferences. The momentum effect partly comes from investors’ aversion to consumption risks. An unexpected dividend increase generates a positive return and increases the asset’s proportion of consumption, raising the correlation between its future dividend growth and consumption growth. This is compensated by a higher expected return, generating the momentum effect. The cross-sectional difference in expected returns is also a key contributor. The quantified model produces sizable momentum profits, often close to the observed profits.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 1 , February 2014 , pp. 107 - 130
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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