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Momentum Profits and Time-Varying Unsystematic Risk

  • Xiafei Li

    (Cass Buisness School, City University (UK))

  • Chris Brooks

    ()

    (ICMA Centre, University of Reading)

  • Joelle Miffre

    (EDHEC Business School (France))

This study assesses whether the widely documented momentum profits can be ascribed to time-varying risk as described by a GJR-GARCH(1,1)-M model. Consistent with rational pricing in efficient markets, we reveal that momentum profits are a compensation for time-varying unsystematic risks, common to the winner and loser stocks. We also find that, because losers have a higher propensity than winners of disclose bad news, negative return shocks increase their volatility more than it increases that of the winners. The volatility of the losers is also found to respond to news more slowly, but eventually to a greater extent, than that of the winners. Following Hong et al. (2000), we interpret this as a sign that managers of loser firms are reluctant to disclosing bad news, while managers of winner firms are eager to releasing good news.

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Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2006-09.

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Length: 25 Pages
Date of creation: Aug 2006
Date of revision: Sep 2006
Publication status: Forthcoming in Journal of Banking and Finance
Handle: RePEc:rdg:icmadp:icma-dp2006-09
Contact details of provider: Postal: PO Box 218, Whiteknights, Reading, Berks, RG6 6AA
Phone: +44 (0) 118 378 8226
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Web page: http://www.henley.reading.ac.uk/

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