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Sources of Momentum Returns: A Decomposition of the Explained and the Unexplained Risk Factors

Last Updated on 10 February, 2024 by Rejaul Karim

Investigating the complexities of momentum returns, the research article “Sources of Momentum Returns: A Decomposition of the Explained and the Unexplained Risk Factors” by Sirajum M. Sarwar provides invaluable insights into the driving forces behind these returns.

A series of fascinating findings emerge from the study, highlighting that the contribution of both explained and unexplained risk factors is contingent upon key variables, such as the level of scrutiny, the particular risk factors employed, and their lag structure.

The research also unveils a stark contrast in the contribution of macroeconomic risk factors, with a 59% monthly contribution at the individual stock level and a considerably lower 9% monthly contribution at the portfolio level. By shedding light on these crucial factors, Sarwar’s in-depth analysis significantly enhances our understanding of momentum theories and uncovers the underlying intricacies that define this realm of finance.

Abstract Of Paper

In this paper, I examine the sources of momentum returns and uncover a list of intriguing features. I find that when the momentum returns are decomposed the contributions of the explained and the unexplained risk factors depend on the level of analysis, the risk factors used, and the lag structure of the risk factors. Further, I find that at the individual stock level, the total contribution of the lagged macroeconomic risk factors is 59 percent per month but that the total contribution of the contemporaneous macroeconomic risk factors at the portfolio level is only 9 percent per month. These new findings add important insights to the existing momentum theories.

Original paper – Download PDF

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Author

Sirajum M. Sarwar
Ryerson University

Conclusion

In conclusion, Sirajum M. Sarwar’s research paper, “Sources of Momentum Returns: A Decomposition of the Explained and the Unexplained Risk Factors,” offers an intricate and insightful analysis of the determinants of momentum returns.

The study reveals compelling findings, where the explained and unexplained risk factors’ contributions hinge upon various criteria, such as the level of examination, the selected risk factors, and their respective lag structures. Furthermore, the research identifies the total contribution of lagged macroeconomic risk factors at the individual stock level as 59 percent per month, contrasting with a lower 9 percent per month at the portfolio level for contemporaneous macroeconomic risk factors.

These groundbreaking discoveries significantly enhance the understanding of momentum theories while providing invaluable contributions to the domain of finance and economics, ultimately shedding light on the multifaceted nature of momentum returns.

Related Reading:

Cross-Sectional Factor Dynamics and Momentum Returns

Momentum in Imperial Russia

FAQ

Q1: What are the key insights regarding the contribution of explained and unexplained risk factors to momentum returns?

The research highlights that the contributions of explained and unexplained risk factors to momentum returns depend on various factors, including the level of analysis, the specific risk factors considered, and their lag structures. The findings emphasize the nuanced nature of the sources driving momentum returns.

Q2: How does the study differentiate the contribution of macroeconomic risk factors at the individual stock level versus the portfolio level?

The research reveals a significant contrast in the contribution of macroeconomic risk factors, with a 59% monthly contribution at the individual stock level. In contrast, the total contribution at the portfolio level for contemporaneous macroeconomic risk factors is considerably lower, standing at 9% per month. This sheds light on the importance of considering different levels of analysis in understanding momentum returns.

Q3: What implications do the research findings have for existing momentum theories?

The findings contribute important insights to existing momentum theories by revealing the complexities involved in the sources of momentum returns. By uncovering the dependency of explained and unexplained risk factors on various factors, the research adds depth to our understanding of momentum strategies, offering valuable considerations for refining existing theories in the field of finance.

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