Momentum Profits and Microeconomic Risk: Revisited
Chelsea Yaqiong Yao, Faculty of Economics & Business, University of Melbourne
15th Feb 2013 11:30 am - Room 214/215 Economics and Business Building
Abstract: Macroeconomic risk continues to be proposed as a source of stock price momentum. For instance, Liu and Zhang (2008) claim that the growth rate of industrial production "plays an important role in driving momentum profits". This paper shows that the growth rate of industrial production is not the source of momentum profits. Because recent winners and recent losers have nearly identical loadings on the growth rate of industrial production outside of January, there is essentially a net zero factor loading in the 11 months of a year when momentum does exist, and a difference only in January, when losers massively outperform winners. We also document the fact that the growth rate of industrial production is not a priced risk factor outside of January. Moreover, application of the same methodology to all factors reveals no evidence that an explanation for momentum profits lies in macroeconomic risk.