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Can the Cross-Sectional Variation in Expected Stock Returns Explain Momentum?

Published online by Cambridge University Press:  01 August 2009

George Bulkley  and
Vivekanand Nawosah
George Bulkley
Affiliation:
Business School, University of Exeter, Streatham Court, Exeter, Devon, EX4 4ST, UK. i.g.bulkley@exeter.ac.uk
Vivekanand Nawosah
Affiliation:
Essex Business School, University of Essex, Wivenhoe Park, Colchester, Essex, CO4 3SQ, UK. vnawo@essex.ac.uk
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Abstract

It has been hypothesized that momentum might be rationally explained as a consequence of the cross-sectional variation of unconditional expected returns. Stocks with relatively high unconditional expected returns will on average outperform in both the portfolio formation period and in the subsequent holding period. We evaluate this explanation by first removing unconditional expected returns for each stock from raw returns and then testing for momentum in the resulting series. We measure the unconditional expected return on each stock as its mean return in the whole sample period. We find momentum effects vanish in demeaned returns.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 4 , August 2009 , pp. 777 - 794
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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