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Investment-Based Momentum Profits

Listed author(s):
  • Liu, Laura Xiaolei

    (Hong Kong University)

  • Zhang, Lu

    (Ohio State University)

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We offer an investment-based explanation of momentum. The neoclassical theory of investment implies that expected stock returns are related to expected investment returns, defined as the next-period marginal benefits of investment divided by the current-period marginal costs of investment. Empirically, winners have higher expected growth of investment-to-capital and higher expected marginal product of capital and consequently higher expected stock returns than losers. The investment-based expected return model captures well the momentum profits across a wide array of momentum portfolios. However, the individual alphas for several testing portfolios are large. All in all, we conclude that momentum is consistent with the value maximization of firms.

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2010-17.

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Date of creation: Sep 2010
Handle: RePEc:ecl:ohidic:2010-17
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