University of Maryland DRUM  
University of Maryland Digital Repository at the University of Maryland

DRUM >
Robert H. Smith School of Business >
Finance >
Finance Research Works >

Please use this identifier to cite or link to this item: http://hdl.handle.net/1903/7491

Title: Rationalizing Momentum Interactions
Authors: Avramov, Doron
Hore, Satadru
Type: Working Paper
Keywords: momentum profitability
credit risk
equilibrium asset pricing
Issue Date: 2007
Citation: Avramov, Doron, and Satadru Hore, 2007, Rationalizing Momentum Interactions.
Abstract: Momentum profitability concentrates in high information uncertainty and high credit risk firms and is virtually nonexistent otherwise. This paper rationalizes such momentum interactions in equilibrium asset pricing. In our paradigm, dividend growth is mean reverting, expected dividend growth is stochastic and highly persistent, the representative agent is endowed with stochastic differential utility of Duffie and Epstein (1992), and leverage, which proxies for credit risk, is modeled based on the Abel's (1999) formulation. Using reasonable risk aversion levels we produce the observational momentum effects. In particular, momentum profitability is especially high in the interaction between high levered and risky cash flow firms. It rapidly deteriorates and ultimately disappears as leverage or cash flow risk diminishes.
URI: http://hdl.handle.net/1903/7491
Appears in Collections:Finance Research Works

Files in This Item:

File Description SizeFormatNo. of Downloads
momentum_interactions.pdf223.83 kBAdobe PDF883View/Open

All items in DRUM are protected by copyright, with all rights reserved.

 

DRUM is brought to you by the University of Maryland Libraries
University of Maryland, College Park, MD 20742-7011 (301)314-1328.
Please send us your comments. -
All Contents