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Momentum profits and time-varying unsystematic risk

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  • Li, Xiafei
  • Miffre, Joëlle
  • Brooks, Chris
  • O'Sullivan, Niall

Abstract

This study assesses whether the widely documented momentum profits can be attributed to time-varying risk as described by a GJR-GARCH(1,1)-M model. We reveal that momentum profits are a compensation for time-varying unsystematic risks, which are common to the winner and loser stocks but affect the former more than the latter. In addition, we find that, perhaps because losers have a higher propensity than winners to disclose bad news, negative return shocks increase their volatility more than they increase those of the winners. The volatility of the losers is also found to respond to news more slowly, but eventually to a greater extent, than that of the winners.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 4 (April)
Pages: 541-558

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:4:p:541-558

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Cited by:
  1. Philip A. Stork, 2011. "The intertemporal mechanics of European stock price momentum," Studies in Economics and Finance, Emerald Group Publishing, vol. 28(3), pages 217-232, August.
  2. Chen, Hong-Yi & Chen, Sheng-Syan & Hsin, Chin-Wen & Lee, Cheng-Few, 2014. "Does revenue momentum drive or ride earnings or price momentum?," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 166-185.
  3. Nicholas Rueilin Lee, 2012. "Firm ratings, momentum strategies, and crises: evidence from the US and Taiwanese stock markets," Financial Markets and Portfolio Management, Springer, vol. 26(4), pages 449-468, December.
  4. Asem, Ebenezer, 2009. "Dividends and price momentum," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 486-494, March.
  5. Huij, Joop & Derwall, Jeroen, 2011. "Global equity fund performance, portfolio concentration, and the fundamental law of active management," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 155-165, January.
  6. Aretz, Kevin & Bartram, Söhnke M. & Pope, Peter F., 2010. "Macroeconomic risks and characteristic-based factor models," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1383-1399, June.
  7. Rossi, Francesco, 2012. "UK cross-sectional equity data: The case for robust investability filters," European Economic Letters, European Economics Letters Group, vol. 1(1), pages 6-13.
  8. Gu, Li & Huang, Dayong, 2010. "Sales order backlogs and momentum profits," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1564-1575, July.
  9. Fuertes, Ana-Maria & Miffre, Joëlle & Rallis, Georgios, 2010. "Tactical allocation in commodity futures markets: Combining momentum and term structure signals," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2530-2548, October.
  10. Wang, Jia & Meric, Gulser & Liu, Zugang & Meric, Ilhan, 2009. "Stock market crashes, firm characteristics, and stock returns," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1563-1574, September.
  11. Morelli, David, 2014. "Momentum profits and conditional time-varying systematic risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 242-255.
  12. Xiafei Li & Chris Brooks & Jöelle Miffre, 2007. "Low-Cost Momentum Strategies," ICMA Centre Discussion Papers in Finance icma-dp2007-12, Henley Business School, Reading University.
  13. John Cotter & Niall O'Sullivan & Francesco Rossi, 2014. "The Conditional Pricing of Systematic and Idiosyncratic Risk in the UK Equity Market," Working Papers 201403, Geary Institute, University College Dublin.
  14. Badreddine, Sina & Galariotis, Emilios C. & Holmes, Phil, 2012. "The relevance of information and trading costs in explaining momentum profits: Evidence from optioned and non-optioned stocks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 589-608.
  15. Kapetanios, George, 2009. "Testing for strict stationarity in financial variables," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2346-2362, December.
  16. Menkhoff, Lukas, 2010. "The Use of Technical Analysis by Fund Managers: International Evidence," Hannover Economic Papers (HEP) dp-446, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  17. Gygax, André F. & Otchere, Isaac, 2010. "Index composition changes and the cost of incumbency," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2500-2509, October.
  18. Yao, Yaqiong, 2012. "Momentum, contrarian, and the January seasonality," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2757-2769.
  19. Mazouz, Khelifa & Joseph, Nathan L. & Joulmer, Joulmer, 2009. "Stock price reaction following large one-day price changes: UK evidence," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1481-1493, August.
  20. Rossi, Francesco, 2011. "Risk components in UK cross-sectional equities: evidence of regimes and overstated parametric estimates," MPRA Paper 38682, University Library of Munich, Germany, revised 31 Mar 2012.
  21. Rossi, Francesco, 2011. "U.K. cross-sectional equity data: do not trust the dataset! The case for robust investability filters," MPRA Paper 38303, University Library of Munich, Germany, revised Nov 2011.

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