What causes Momentum Returns? Evidence from different Asset Classes

Seminar Paper , 2021 , 24 Pages , Grade: 2,0

Business economics - Investment and Finance

This paper discusses possible asset-specific and cross-asset explanation approaches for momentum appearance. The two main threads in literature, stock momentum and momentum of other assets, are discussed separately and subsequently checked for overlaps. The paper also deals with the definition of momentum as an anomaly itself in context of rational and behavioral concepts. It uncovers selected contrary observations and outlines possible conformities.

Capital market anomalies are a phenomenon triggering ongoing debates about the trading behavior of investors on financial markets. They are contradicting the core ideas of the efficient market hypothesis (EMH), which considers financial markets efficient and investors rational and fully informed. One of the EMH key hypotheses, especially supported by Fama and by Samuelson, is the principle of random walk.

If this principle holds, the prices of assets on financial markets are only influenced by public and firm-specific news, develop apart from that completely random and are not predictable. However, empirical observations question the random walk principle. They tend to indicate specific patterns in asset price developments instead of complete randomness. Doubts on the EMH and the random walk principle thus cannot be neglected.

A common answer to these observations is the existence of additional risk factors which are currently not covered by the applied pricing models. Current asset pricing models mainly rely on Markowitz (1952) and the modern portfolio theory as well as on the Capital Asset Pricing Model (CAPM) from Sharpe (1964), Lintner (1965), and Mossin (1966). These models are rather a benchmark for asset pricing than perfect constructions covering all and any existing risk factors which are relevant for an assets price formation.

Table of Contents

Table of Contents

List of Abbreviations

1. Introduction

2. Momentum as a Capital Market Anomaly
2.1 Evidence from Equity Markets
2.2 Evidence from other Asset Classes

3. Explanatory Approaches
3.1 Explanatory Approaches for Equity Markets
3.2 Explanatory Approaches for other Asset Classes

4. Cross-Asset Explanatory Approaches
4.1 Approaches in Accordance with the Efficient Market Hypothesis
4.2 Approaches in Accordance with Behavioral Finance

5. Transferability of Explanatory Approaches
5.1 Contrary Observations
5.2 Equal Approaches

6. Conclusion

References

• College: University of Münster
• Grade: 2,0
• Author: Fabian Hertel (Author)
• Publication Year: 2021
• Pages: 24
• Catalog Number: V1176923
• ISBN (PDF): 9783346608796
• ISBN (Book): 9783346608802
• Language: English
• Tags: what, momentum, returns, evidence, asset, classes