Momentum Profits and Time-Varying Unsystematic Risk

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.

Author(s):

Xiafei LiPh.D.

student, Cass Business School, City University (UK)

Joelle Miffre

Associate Professor of Finance, EDHEC Business School

Chris Brooks

Professor of Finance, ICMA Centre, University of Reading (UK)

We reveal that, consistent with rational pricing in efficient markets 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 to disclose bad news, negative return shocks increase their volatility more than they increase 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 disclose bad news, while managers of winner firms are eager to release good news.

Type: Working paper
Date: le 13/12/2007
Research Cluster : Finance

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