Working Paper: NBER ID: w11480
Authors: Laura X.L. Liu; Jerold B. Warner; Lu Zhang
Abstract: 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.
Keywords: momentum profits; macroeconomic risk; industrial production
JEL Codes: G12; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| growth rate of industrial production (MP) (L16) | momentum profits (C69) |
| winners have higher MP loading (L97) | momentum profits (C69) |
| loading dispersion (D39) | momentum profits (C69) |
| winners have higher MP loading (L97) | losers have lower MP loading (L97) |
| MP loading dispersion converges (C69) | MP loading for winners and losers (C72) |