Working Paper: CEPR ID: DP10601
Authors: Heiko Jacobs; Tobias Regele; Martin Weber
Abstract: Motivated by the time-series insights of Daniel and Moskowitz (2014), we investigate the link between expected skewness and momentum in the cross-section. The three factor alpha of skewness-enhanced (-weakened) momentum strategies is about twice (half) as large as the traditional momentum alpha. In fact, skewness is among the most important cross-sectional determinants of momentum. Our findings do not neatly fit within a specific prominent theory of momentum. Due to the simplicity of the approach, its economic magnitude, and its existence among large stocks and in the recent past, the results appear difficult to reconcile with the efficient market hypothesis.
Keywords: behavioral finance; market efficiency; momentum; return predictability; skewness
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected skewness (C46) | momentum profits (C69) |
| skewness of winners (C46) | momentum profits (C69) |
| skewness of losers (C46) | momentum profits (C69) |
| skewness-enhanced momentum strategies (C58) | three-factor alpha (C38) |
| negatively skewed winners and positively skewed losers (C46) | profitability of enhanced momentum strategies (G11) |