The Unexplainable Nature of Momentum Portfolio Returns

Abstract

We find that momentum portfolio returns are still unexplainable after addressing two major concerns in the “Investment Manifesto” of Lin and Zhang [1]: lack of economic basis in risk factor models and aggregate data measurement error. Our model represents a synthesis of the exchange economy model of Lucas and closed economy exogenous growth model of King and Rebelo. We mitigate data measurement error by utilizing firm-level financial data and production functions rather than macroeconomic data and utility functions. Although our results fail to completely explain momentum, they are consistent with the “Investment Manifesto” suggestion that firm-level market-to-book and productivity are important factors in describing returns.