Momentum Profits and Non-Normality Risks

The paper examines the role of non-normality risks in explaining the momentum puzzle of equity returns.

Author(s):

Ana-Maria Fuertes

Associate Professor of Finance, Cass Business School, City University London

Joelle Miffre

Professor of Finance, EDHEC Business School

Wooi-Hou Tan

Director, Cyberring Ltd, London

It shows that momentum returns are not normally distributed. About 70 basis points of the annual momentum profits can be attributed to systematic skewness risk. This finding is pervasive across nine strategies and is reinforced when time dependencies in abnormal returns and risks are explicitly modeled. The analysis also reveals that the market and skewness risks of momentum portfolios evolve over the business cycle in a manner that is consistent with market timing and risk aversion. While the momentum puzzle still remains, these findings are in line with market efficiency.

Type: Working paper
Date: le 05/02/2007
Research Cluster : Finance

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