Economic activity and momentum profits: further evidence

Maio, P.; Philip, D.

Abstract

We show that economic activity plays an important role in explaining momentum-based anomalies. A simple two-factor model containing the market and alternative indicators of economic activity as risk factors—industrial production, capacity utilization rate, retail sales, and a broad economic index—offers considerable explanatory power for the cross-section of price and industry momentum portfolios. Hence past winners enjoy higher average returns than past losers because they have larger macroeconomic risk. The model compares favorably with popular multifactor models used in the literature. Moreover, our model is consistent with Merton’s Intertemporal CAPM framework, since the macro variables forecast stock market volatility and future economic activity.

Citation

Maio, P., & Philip, D. (2018). Economic activity and momentum profits: further evidence. Journal of Banking and Finance, 88, 466-482. https://doi.org/10.1016/j.jbankfin.2018.01.013

• Journal Article Type: Article
• Acceptance Date: Jan 22, 2018
• Online Publication Date: Jan 31, 2018
• Publication Date: Mar 1, 2018
• Deposit Date: Jan 22, 2018
• Publicly Available Date: Jul 31, 2019
• Journal: Journal of Banking and Finance
• Print ISSN: 0378-4266
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 88
• Pages: 466-482
• DOI: https://doi.org/10.1016/j.jbankfin.2018.01.013
• Public URL: https://durham-repository.worktribe.com/output/1336240
• Related Public URLs: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2257869