Rational Momentum Effects

Momentum effects in stock returns need not imply investor irrationality, heterogeneous information, or market frictions. A simple, single-firm model with a standard pricing kernel can produce such effects when expected dividend growth rates vary over time. An enhanced model, under which persistent g...

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Bibliographic Details
Published in:The Journal of finance (New York) 2002-04, Vol.57 (2), p.585-608
Main Author: Johnson, Timothy C.
Format: Article
Language:English
Subjects:
Covariance
Dividends
Economic growth rate
Economic models
Expected returns
Investment risk
Marginal utility
Modeling
Price momentum
Rates of return
Rational expectations
Stock prices
Studies
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Summary:Momentum effects in stock returns need not imply investor irrationality, heterogeneous information, or market frictions. A simple, single-firm model with a standard pricing kernel can produce such effects when expected dividend growth rates vary over time. An enhanced model, under which persistent growth rate shocks occur episodically, can match many of the features documented by the empirical research. The same basic mechanism could potentially account for underreaction anomalies in general.
ISSN:0022-1082
1540-6261
DOI:10.1111/1540-6261.00435