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Momentum Profits and Macroeconomic States : Is Winner Riskier than Loser?

  • Byoung Kyu Min Graduate School of Finance, Korea Advanced Institute of Science and Technology, Hoegiro, Dongdaemoon-gu, Seoul, 130-722, Korea
  • Tong Suk Kim Graduate School of Finance, Korea Advanced Institute of Science and Technology, Hoegiro, Dongdaemoon-gu, Seoul, 130-722, Korea
We examine whether momentum profits and macroeconomic risk are related. We find that momentum strategy generates economically large negative profits in bad economic states, while positive profits in good economic states, when we define states of nature based on the expected market risk premium, instead of on the realized market excess return. Our findings suggest that time variation in momentum strategy is linked to variations in macroeconomic risk. Thus, our results are consistent with risk- based explanations of momentum.

  • Byoung Kyu Min
  • Tong Suk Kim
We examine whether momentum profits and macroeconomic risk are related. We find that momentum strategy generates economically large negative profits in bad economic states, while positive profits in good economic states, when we define states of nature based on the expected market risk premium, instead of on the realized market excess return. Our findings suggest that time variation in momentum strategy is linked to variations in macroeconomic risk. Thus, our results are consistent with risk- based explanations of momentum.
Momentum,Macroeconomic risk,Expected market risk premium,Market efficiency.