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Cross-Sectional Factor Dynamics and Momentum Returns

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  • Doron Avramov
  • Satadru Hore

Abstract

This paper proposes and implements an inter-temporal model wherein aggregate consumption and asset-specific dividend growths jointly move with two mean-reverting state variables. Consumption beta varies through time and cross sectionally due to variation in half-lives and stationary volatilities of the dividend signals. Winner (Loser) stocks exhibit high (low) half-lives and stationary volatilities, and thus exhibit high (low) consumption beta commanding high (low) risk-premium. The model also rationalizes the \"momentum crashes\" phenomenon discussed in Daniel and Moskowitz (2014). High half-lives of dividend signals in Winners keep their consumption betas low long after recovering from a prolonged economic downturn, while low half-lives in Losers make their consumption betas grow rather quickly. Thus, coming out of a recession, the long Winner/short Loser strategy reduces in consumption beta and, hence, risk-premia.

Suggested Citation

  • Doron Avramov & Satadru Hore, 2015. "Cross-Sectional Factor Dynamics and Momentum Returns," Supervisory Research and Analysis Working Papers RPA 15-2, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbqu:rpa15-2
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    More about this item

    Keywords

    Momentum; Cross-Sectional Dynamics; Long-Run Risk; Bayesian Filtering;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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