Working Paper: NBER ID: w23910
Authors: Andrei S. Gonalves; Chen Xue; Lu Zhang
Abstract: Two innovations in the structural investment model go a long way in explaining value and momentum jointly. Firm-level investment returns are constructed from firm-level accounting variables, and are then aggregated to the portfolio level to match with portfolio-level stock returns. In addition, current assets form a separate production input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums jointly, and partially explains the positive stock-investment return correlations, the procyclicality and short-term dynamics of the momentum and profitability premiums, and the countercyclicality and long-term dynamics of the value and investment premiums. However, the model fails to explain momentum crashes.
Keywords: No keywords provided
JEL Codes: E13; E22; G12; G14; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| two-capital model (O41) | explanation of value and momentum premiums (G41) |
| introduction of current assets as production input (D25) | improvements in explaining value and momentum premiums (G41) |
| aggregation of firm-level variables (L25) | improvements in explaining value and momentum premiums (G41) |
| two-capital model (O41) | stability of parameter estimates for value and momentum premiums (C51) |
| failure of previous models to account for joint behavior of value and momentum premiums (G41) | necessity of accounting for capital heterogeneity (D29) |
| two-capital model (O41) | rejection by overidentification tests (C52) |
| two-capital model (O41) | captures some dynamics of value and momentum premiums (G11) |