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  2. ASSA Annual Meeting
  3. 2021
  4. Preliminary Program
  5. Asset Pricing: Return Dynamics
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Asset Pricing: Return Dynamics

Paper Session

Sunday, Jan. 3, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: American Finance Association
  • Chair: Tyler Muir, University of California-Los Angeles

Momentum Turning Points

Ashish Garg
,
Research Affiliates
Christian Goulding
,
Research Affiliates
Campbell Harvey
,
Duke University
Michele Mazzoleni
,
Research Affiliates

Abstract

Momentum is one of the most pervasive factors---yet one of the most difficult to explain. Many have offered justifications ranging from extrapolative expectations to the slow absorption of information. However, none of these theories tell us about the optimal lookback horizon for a momentum strategy or how that horizon might change through time. We examine theoretically and empirically how momentum portfolios of various intermediate lookback periods, formed by blending slow and fast strategies, cope with turning points. Our model predicts an optimal dynamic lookback selection strategy. We apply this strategy across domestic and international equity markets and document efficient out-of-sample performance. We also propose a novel decomposition of momentum strategy alpha, highlighting the role of volatility timing.

Equity Duration and Predictability

Benjamin Golez
,
University of Notre Dame
Peter Koudijs
,
Stanford University

Abstract

One of the most puzzling findings in asset pricing is that expected returns dominate variation in the dividend-to-price ratio, leaving little room for dividend growth rates. Even more puzzling is that this dominance only emerged after 1945. We develop a present value model to argue that a general increase in equity duration can explain these findings. As cash flows to investors accrue further into the future, shocks to highly persistent expected returns become relatively more important than shocks to growth rates. We provide supportive empirical evidence from dividend strips, the time-series, and the cross-section of stocks.

Pre-Announcement Risk

Toomas Laarits
,
New York University

Abstract

I propose and test a new explanation for the pre-FOMC announcement drift puzzle. I show that such a drift arises in a model where investors interpret a given FOMC action differently based on recent news. If recent news has been good, FOMC announcements are seen as signals about economic conditions; if recent news has been poor, they are seen as signals about the Fed's own policy stance. Consistent with the model, I demonstrate that the market return prior to the announcement---a proxy for recent news---predicts the interpretation of Fed action. In the model the pre-FOMC drift represents a risk premium associated with the resolution of uncertainty about announcement type. The model does not require informational leaks or biased beliefs and can account for the seasonality of aggregate returns over the FOMC calendar.
Discussant(s)
Ravi Jagannathan
,
Northwestern University
Niels J. Gormsen
,
University of Chicago
Nina Boyarchenko
,
Federal Reserve Bank of New York
JEL Classifications
  • G1 - Asset Markets and Pricing