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- W1650585008 abstract "Momentum profits are generated by winners' exposureto aggregate volatility risk. A proxy for aggregate volatilityshock (AVS) which comes from an EGARCH (1,1) model of monthlymarket excess returns is a priced risk factor in cross-sectionalregressions and commands a negative risk premium. Winners havenegative AVS loadings thereby earning higher average returns thando losers. Event time analyses reveal important insights about thetemporary nature of momentum profits. For example, I find thatwinners have lower AVS loadings than do losers over the first 6months of the holding period and that the difference in loadingsbecomes mostly insignicant thereafter. Another event-time studyshows that the profitability of momentum strategies after up-marketstates can also be attributed to the difference in aggregatevolatility risk. I explain the negative AVS loadings of winnerswith a real option argument. Over the evaluation period winnerfirms develop growth options and their market values becomesensitive to aggregate demand conditions. AVS is a negative demandshock that causes investment cuts and downward revisions in futureearnings. The decline in investment growth and thereby the loss inmarket value is more pronounced for winners. Moreover, the reversalof momentum returns one year after portfolio formation is partlyexplained by the negative cross-sectional relation between realinvestment and average returns. Additional robustness checks andcomparison with conditional CAPM suggest that the ICAPM withaggregate volatility risk is an important multifactor model thataccounts for the cross-sectional return variation of momentumstocks." @default.
- W1650585008 created "2016-06-24" @default.
- W1650585008 creator A5043344114 @default.
- W1650585008 date "2012-01-01" @default.
- W1650585008 modified "2023-09-27" @default.
- W1650585008 title "Aggregate Volatility Risk and Momentum Returns" @default.
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- W1650585008 doi "https://doi.org/10.2139/ssrn.2080638" @default.
- W1650585008 hasPublicationYear "2012" @default.
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