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DECOMPOSITION OF MOMENTUM RETURNS: WHICH COMPONENT CONTRIBUTES MOST?

By Sirajum Munira, Gulnur Muradoglu and Soosung Hwang

Abstract

This paper investigates the contribution of common components and stock specific components in generating momentum return. Using a decomposition approach in a multidimensional framework we report that momentum return resulted from all stocks listed in the NYSE, AMEX and NASDAQ from 1926 through 2005 is a contribution of stockspecific components. Our decomposition approach shows that at the portfolio level with Fama-French three factors the contribution of stock-specific component is 90 percent, whilst the same is 65 percent with macroeconomic variables. At the individual stock level however the contribution of stock-specific components declines, on average, by 20 percent. Our results are robust in different sub-periods and when predictor variables are employed. We conclude that though the contribution of common components cannot be eliminated, it is however not as crucial as stock-specific components

Topics: JEL classifications
Year: 2011
OAI identifier: oai:CiteSeerX.psu:10.1.1.192.7449
Provided by: CiteSeerX
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