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Momentum Effect as Part of a Market Equilibrium

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  • Choi, Seung Mo
  • Kim, Hwagyun

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.

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  • Choi, Seung Mo & Kim, Hwagyun, 2014. "Momentum Effect as Part of a Market Equilibrium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(1), pages 107-130, February.
    • Handle: RePEc:cup:jfinqa:v:49:y:2014:i:01:p:107-130_00
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    Cited by:

    1. Choi, Paul Moon Sub & Chung, Chune Young & Kim, Dongnyoung, 2020. "Corporate tax, financial leverage, and portfolio risk," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    2. Jeong, Daehee & Kim, Hwagyun & Park, Joon Y., 2015. "Does ambiguity matter? Estimating asset pricing models with a multiple-priors recursive utility," Journal of Financial Economics, Elsevier, vol. 115(2), pages 361-382.
    3. Guillaume Coqueret, 2022. "Characteristics-driven returns in equilibrium," Papers 2203.07865, arXiv.org.
    4. Docherty, Paul & Hurst, Gareth, 2018. "Return dispersion and conditional momentum returns: International evidence," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 263-278.
    5. Wilhelm Berghorn & Sascha Otto, 2017. "Momentum: An Economic View," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 8(3), pages 142-153, July.

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