“Broad-Market Return Persistence and Momentum Profits” by Ying-Foon CHOW
Authors:
Ying-Foon CHOW
The Chinese University of Hong KongMing LIU
The Chinese University of Hong KongXinting FAN
Instead of the much emphasized stock-specific or idiosyncratic nature of genesis as in Jegadeesh and Titman (1993), Grundy and Martin (2001), among others, momentum profits are shown driven largely by the broad market return persistence between formation period and holding period. The broad-market return persistence is derived, for any time being, as the regression slope coefficient of the cross-section regression with holding period returns regressed on the formation period returns. We show, to drive the broad market persistence or the momentum profit, that Fama-French three-factor model imposes risk premia with too little variability in cross-section, while the business cycle model of Chordia and Shivakumar (2002) imposes risk premia with too much volatility in time series. Our findings provide support for the importance of an aggregate perspective in understanding the momentum profits.
