"Market States and Momentum", 2004, with Michael Cooper and Allaudeen Hameed, Journal of Finance 59, 1345-1365
We test overreaction theories of short-run momenutm and long-run reversal in the cross section of stock returns. Momentum profits depend on the state of the market, as predicted. From 1929 to 1995, the mean monthly momentum profit following positive market returns is 0.93 percent, whereas the mean profit following negative market returns is negative 0.37 percent. The up-market momentum reverses in the long-run. Our results are robust to the conditioning information in macroeconomic factors. Moreover, we find that macroeconomic factors are unable to explain momentum profits after simple methodological adjustments to take account of microstructure concerns.
Researchers have documented an abundance of evidence that stock returns are predictable ex post. We address in this study whether the cross section of stock returns is predictable ex ante. We ask if a realtime investor could have used booktomarket equity, firm size, and oneyear lagged returns to forecast stock returns during the 1974 to 1997 period. Using a recursive outof sample method, we find that the market was difficult to beat in real time. Our findings suggest that the current notion of predictability in the literature is exaggerated.
We identify two types of momenta in stock returns – one due to returns relative to other stocks and one due to firm specific abnormal returns, where abnormal is determined by a stock’s idiosyncratic return variation. Despite similar performances over the first year, these momentum portfolios perform dramatically differently beyond year one. Relative-return momentum reverses strongly; abnormal-return momentum continues for years. This complexity in return momentum challenges the current theories of momentum. We propose that both momenta are consequences of agency issues in the money management industry and provide empirical support for this economic rationale of momentum in returns. Incentives induce institutions to chase relative returns and to underreact to firm-specific abnormal returns.
Reversal is the current stylized fact of weekly returns. However, we find that an opposing and long-lasting continuation in returns follows the welldocumented brief reversal. These subsequent momentum profits are strong enough to offset the initial reversal and to produce a significant momentum effect over the full year following portfolio formation. Thus, ex post, extreme weekly returns are not too extreme. Our findings extend to weekly price movements with and without public news. In addition, there is no relation between news uncertainty and the momentum in one-week returns.
"Time Variation in Attention to Earnings Through the Lens of the Media" with Charles Gaa
"Institutional Crowding and Stock Price Dislocations," with Eric Kelley
“The Stock Price Reaction to 13F Portfolio Disclosures by Institutional Investors”, with Eric Kelley and Gerald Martin