Momentum Profits and Macroeconomic Risk

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. Finance Department, HKUST Business School, Clear Water Bay, Kowloon, Hong Kong. Tel: (585)2754604, and email: [email protected]. Corresponding author: Jerold B. Warner, CS 3-160H, Simon School, University of Rochester, 500 Wilson Blvd, Rochester NY 14627. Tel: (585)275-2678, fax: (585)442-6323, and email: [email protected]. CS 3-160B, Simon School, University of Rochester, 500 Wilson Blvd, Rochester NY 14627. Tel: (585)2753491, fax: (585)273-1140, and email: [email protected]. We acknowledge helpful comments from Cam Harvey, Spencer Martin, and seminar participants at Michigan State University, University of California at Berkeley, University of Illinois at Urbana-Champaign, University of Rochester, Midwest Finance Association Meetings, Southwestern Finance Association Meetings, Washington Area Finance Association Meetings, Finance Summit I, and Western Finance Association Meetings. This paper supercedes our previous working paper titled “Economic fundamentals, risk, and momentum profits.”