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Business cycle, expected return and momentum payoffs

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  • Chen, Jiun-Lin (Alex)
  • Hwang, Hyoseok (David)

Abstract

This paper applies the concept of time-varying risk premium at firm level and examines whether business cycles affect each firm differently. To this end, we use macroeconomic variables to predict expected returns at firm level and attempt to explain momentum payoffs. Our empirical results show past winners tend to have higher expected returns while past losers have lower expected returns predicted by macroeconomic variables. Also, discount rates of winners are likely to move downward while those of losers move upward contrarily. Therefore, we confirm cross-sectional differences in expected returns and their variation through time can contribute to momentum payoffs.

Suggested Citation

  • Chen, Jiun-Lin (Alex) & Hwang, Hyoseok (David), 2019. "Business cycle, expected return and momentum payoffs," Finance Research Letters, Elsevier, vol. 29(C), pages 83-89.
    • Handle: RePEc:eee:finlet:v:29:y:2019:i:c:p:83-89
    DOI: 10.1016/j.frl.2019.03.021
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    More about this item

    Keywords

    Stock momentum; Macroeconomic factor; Business cycle;
    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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