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Momentum and downside risk

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  • Min, Byoung-Kyu
  • Kim, Tong Suk

Abstract

We examine whether time-variation in the profitability of momentum strategies is related to variation in macroeconomic conditions. We find reliable evidence that the momentum strategy exposes investors to greater downside risk. Momentum strategies deliver economically large and statistically reliable negative profits in bad economic states when the expected market risk premium is high, whereas positive profits in good economic states when the expected market risk premium is low. Our results are robust to alternative constructions of momentum portfolios, out-of-sample estimation of the expected market risk premium, and after controlling for the January effect, lagged market return, and investor sentiment.

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  • Min, Byoung-Kyu & Kim, Tong Suk, 2016. "Momentum and downside risk," Journal of Banking & Finance, Elsevier, vol. 72(S), pages 104-118.
    • Handle: RePEc:eee:jbfina:v:72:y:2016:i:s:p:s104-s118
    DOI: 10.1016/j.jbankfin.2016.04.005
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    More about this item

    Keywords

    Momentum; Economic state; Expected market risk premium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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