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Momentum, Business Cycle, and Time‐varying Expected Returns

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  • Tarun Chordia
  • Lakshmanan Shivakumar

Abstract

A growing number of researchers argue that time‐series patterns in returns are due to investor irrationality and thus can be translated into abnormal profits. Continuation of short‐term returns or momentum is one such pattern that has defied any rational explanation and is at odds with market efficiency. This paper shows that profits to momentum strategies can be explained by a set of lagged macroeconomic variables and payoffs to momentum strategies disappear once stock returns are adjusted for their predictability based on these macroeconomic variables. Our results provide a possible role for time‐varying expected returns as an explanation for momentum payoffs.

Suggested Citation

  • Tarun Chordia & Lakshmanan Shivakumar, 2002. "Momentum, Business Cycle, and Time‐varying Expected Returns," Journal of Finance, American Finance Association, vol. 57(2), pages 985-1019, April.
    • Handle: RePEc:bla:jfinan:v:57:y:2002:i:2:p:985-1019
    DOI: 10.1111/1540-6261.00449
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