There are still ongoing debates on pro…tability of momentum strategies mainly due to its sensitivity to the choice of benchmark asset pricing model in its risk adjustment. In this paper, we explore admissibility conditions for the benchmark asset pricing model which should be met, so they could be used as diagnostic tool in risk adjustment of momentum strategies. Under this benchmark, high/low risk assets should have relatively higher frequency of being included in the winners/losers group and the risk of a momentum strategy rises with respect to the positive market wide average risk premium. Empirically, we examined if each risk measure satis…es our admissibility conditions and we found that non-parametric risk measures satisfy our rationality condition, while market betas do not. This simple but important result may be one explanation regarding the di¤erence in the pro…tability assessment of momentum trading strategies.
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