The Unexplainable Nature of Momentum Portfolio Returns
Affiliation(s)
College of Business, Administration, California State University, Sacramento, USA. Department of Finance, University of Tennessee, Knoxville, USA.
College of Business, Administration, California State University, Sacramento, USA. Department of Finance, University of Tennessee, Knoxville, USA.
ABSTRACT
We find that momentum portfolio returns are still unexplainable after addressing two major concerns in the “Investment Manifesto” of Lin and Zhang [1]: lack of economic basis in risk factor models and aggregate data measurement error. Our model represents a synthesis of the exchange economy model of Lucas and closed economy exogenous growth model of King and Rebelo. We mitigate data measurement error by utilizing firm-level financial data and production functions rather than macroeconomic data and utility functions. Although our results fail to completely explain momentum, they are consistent with the “Investment Manifesto” suggestion that firm-level market-to-book and productivity are important factors in describing returns.
Cite this paper
Moore, D. and Philippatos, G. (2014) The Unexplainable Nature of Momentum Portfolio Returns. Journal of Mathematical Finance, 4, 135-147. doi: 10.4236/jmf.2014.43013.
Moore, D. and Philippatos, G. (2014) The Unexplainable Nature of Momentum Portfolio Returns. Journal of Mathematical Finance, 4, 135-147. doi: 10.4236/jmf.2014.43013.
References
[1] Lin, X.J. and Zhang, L. (2013) The Investment Manifesto. Journal of Monetary Economics, 60, 351-366.
http://dx.doi.org/10.1016/j.jmoneco.2013.01.001 [2] Carhart, M.M. (1997) On Persistence in Mutual Fund Performance. The Journal of Finance, 52, 57-82. [3] Fama, E.F. and French, K.R. (1996) Multifactor Explanations of Asset Pricing Anomalies. The Journal of Finance, 51, 55-84. http://dx.doi.org/10.1111/j.1540-6261.1996.tb05202.x [4] Cochrane, J.H. (2005) Asset Pricing. Princeton University Press, Princeton. [5] Lewellen, J. and Nagel, S. (2006) The Conditional CAPM Does Not Explain Asset-Pricing Anomalies. Journal of Financial Economics, 82, 289-314. http://dx.doi.org/10.1016/j.jfineco.2005.05.012 [6] King, R.G. and Rebelo, S.T. (1999) Resuscitating Real Business Cycles. In: Taylor, J.B. and Woodford, M., Eds., Handb Macroecon, North Holland, Amsterdam. [7] Lucas Jr., R.E. (1978) Asset Prices in an Exchange Economy. Econometrica, 46, 1426-1445.
http://dx.doi.org/10.2307/1913837 [8] Abel, A.B. and Blanchard, O.J. (1983) An Intertemporal Model of Saving and Investment. Econometrica, 51, 675-692.
http://dx.doi.org/10.2307/1912153 [9] Sala-i Martin, X. (1990) Lecture Notes on Economic Growth (i): Introduction to the Literature and Neoclassical Models. NBER Work Paper Series, Work Paper 3563. [10] Jorgenson, D.W. (1972) Investment Behavior and the Production Function. Bell Journal of Economics, 3, 220-251.
http://dx.doi.org/10.2307/3003076 [11] Hayashi, F. (1982) Tobin’s Marginal q and Average q: A Neoclassical Interpretation. Econometrica, 50, 213-224.
http://dx.doi.org/10.2307/1912538 [12] Arroyo, C.R. (1996) Testing a Production-Based Asset-Pricing Model. Economic Inquiry, 357-377. [13] Brock, W.A. (1982) Asset Prices in a Production Economy, In: The Economics of Information and Uncertainty, Chapter 1. The University of Chicago Press, Chicago, 1-46. [14] Fama, E.F. and French, K.R. (2012) Size, Value, and Momentum in International Stock Returns. Journal of Financial Economics, 105, 457-472. http://dx.doi.org/10.1016/j.jfineco.2012.05.011 [15] Chordia, T. and Shivakumar, L. (2006) Earnings and Price Momentum. Journal of Financial Economics, 80, 627-656.
http://dx.doi.org/10.1016/j.jfineco.2005.05.005 [16] Andrews, D.W.K. (1991) Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation. Econometrica, 59, 817-858. http://dx.doi.org/10.2307/2938229 [17] Breeden, D.T., Gibbons, M.R. and Litzenberger, R.H. (1989) Empirical Tests of the Consumption-Oriented CAPM. The Journal of Finance, 44, 231-262. [18] Ferson, W.E. and Foerster, S.R. (1994) Finite Sample Properties of the Generalized Method of Moments in Tests of Conditional Asset Pricing Models. Journal of Financial Economics, 36, 29-55.
http://dx.doi.org/10.1016/0304-405X(94)90029-9 [19] Ferson, W.E. and Harvey, C.R. (1992) Seasonality and Consumption-Based Asset Pricing. The Journal of Finance, 47, 511-552. http://dx.doi.org/10.1111/j.1540-6261.1992.tb04400.x
[1] Lin, X.J. and Zhang, L. (2013) The Investment Manifesto. Journal of Monetary Economics, 60, 351-366.
http://dx.doi.org/10.1016/j.jmoneco.2013.01.001 [2] Carhart, M.M. (1997) On Persistence in Mutual Fund Performance. The Journal of Finance, 52, 57-82. [3] Fama, E.F. and French, K.R. (1996) Multifactor Explanations of Asset Pricing Anomalies. The Journal of Finance, 51, 55-84. http://dx.doi.org/10.1111/j.1540-6261.1996.tb05202.x [4] Cochrane, J.H. (2005) Asset Pricing. Princeton University Press, Princeton. [5] Lewellen, J. and Nagel, S. (2006) The Conditional CAPM Does Not Explain Asset-Pricing Anomalies. Journal of Financial Economics, 82, 289-314. http://dx.doi.org/10.1016/j.jfineco.2005.05.012 [6] King, R.G. and Rebelo, S.T. (1999) Resuscitating Real Business Cycles. In: Taylor, J.B. and Woodford, M., Eds., Handb Macroecon, North Holland, Amsterdam. [7] Lucas Jr., R.E. (1978) Asset Prices in an Exchange Economy. Econometrica, 46, 1426-1445.
http://dx.doi.org/10.2307/1913837 [8] Abel, A.B. and Blanchard, O.J. (1983) An Intertemporal Model of Saving and Investment. Econometrica, 51, 675-692.
http://dx.doi.org/10.2307/1912153 [9] Sala-i Martin, X. (1990) Lecture Notes on Economic Growth (i): Introduction to the Literature and Neoclassical Models. NBER Work Paper Series, Work Paper 3563. [10] Jorgenson, D.W. (1972) Investment Behavior and the Production Function. Bell Journal of Economics, 3, 220-251.
http://dx.doi.org/10.2307/3003076 [11] Hayashi, F. (1982) Tobin’s Marginal q and Average q: A Neoclassical Interpretation. Econometrica, 50, 213-224.
http://dx.doi.org/10.2307/1912538 [12] Arroyo, C.R. (1996) Testing a Production-Based Asset-Pricing Model. Economic Inquiry, 357-377. [13] Brock, W.A. (1982) Asset Prices in a Production Economy, In: The Economics of Information and Uncertainty, Chapter 1. The University of Chicago Press, Chicago, 1-46. [14] Fama, E.F. and French, K.R. (2012) Size, Value, and Momentum in International Stock Returns. Journal of Financial Economics, 105, 457-472. http://dx.doi.org/10.1016/j.jfineco.2012.05.011 [15] Chordia, T. and Shivakumar, L. (2006) Earnings and Price Momentum. Journal of Financial Economics, 80, 627-656.
http://dx.doi.org/10.1016/j.jfineco.2005.05.005 [16] Andrews, D.W.K. (1991) Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation. Econometrica, 59, 817-858. http://dx.doi.org/10.2307/2938229 [17] Breeden, D.T., Gibbons, M.R. and Litzenberger, R.H. (1989) Empirical Tests of the Consumption-Oriented CAPM. The Journal of Finance, 44, 231-262. [18] Ferson, W.E. and Foerster, S.R. (1994) Finite Sample Properties of the Generalized Method of Moments in Tests of Conditional Asset Pricing Models. Journal of Financial Economics, 36, 29-55.
http://dx.doi.org/10.1016/0304-405X(94)90029-9 [19] Ferson, W.E. and Harvey, C.R. (1992) Seasonality and Consumption-Based Asset Pricing. The Journal of Finance, 47, 511-552. http://dx.doi.org/10.1111/j.1540-6261.1992.tb04400.x