NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Momentum Profits and Macroeconomic Risk

Laura X.L. Liu, Jerold B. Warner, Lu Zhang

NBER Working Paper No. 11480
Issued in July 2005
NBER Program(s):   AP

Previous work shows that the growth rate of industrial production is a common macroeconomic risk factor in the cross-section of expected returns. We demonstrate the connection between momentum profits and shifts in factor loadings on this macroeconomic variable. Winners have temporarily higher loadings on the growth rate of industrial production than losers. The loading dispersion derives mostly from the high, positive loadings of winners. Depending on model specification, this loading dispersion can explain up to 40% of momentum profits.

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Document Object Identifier (DOI): 10.3386/w11480

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