Rationalizing Momentum Interactions
Rationalizing Momentum Interactions
Files
Publication or External Link
Date
2007
Authors
Avramov, Doron
Hore, Satadru
Advisor
Citation
Avramov, Doron, and Satadru Hore, 2007, Rationalizing Momentum Interactions.
DRUM DOI
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.