What Explains Price Momentum and 52-Week High Momentum When They Really Work?

Event Date: 18 October 2023

Speaker: Professor Pedro Monteiro Barroso (Católica-Lisbon School of Business and Economics)

Venue: CW506A

Time: 2pm

Abstract:

After long being one of the main puzzles in asset pricing, momentum has ironically become a case of observational equivalence. It can now be explained both by behavioral factors capturing mispricing and by the neoclassical-inspired investment q-factors. On top of this, q-factors also explain the related 52-week-high anomaly. We note that recent tests subsuming both anomalies are unconditional exercises while the bulk of momentum profits are predictable and occur in bull markets and after periods of low volatility. Comparing asset pricing models conditionally, when the strategies actually work, we find the unconditional fit is misleading. The models fit well most of the time but not when the profits are produced. Noticeably, q-theory implies time-varying loadings that are not consistent with the data. On the other hand, consistent with an underreaction channel, earnings announcement returns and analyst forecast errors both decrease steeply with lagged volatility.

Published: 25 October 2023