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An analysis on the predictability of CAPM beta for momentum returns
Author(s) -
Cenesizoglu Tolga,
Papageorgiou Nicolas,
Reeves Jonathan J.,
Wu Haifeng
Publication year - 2019
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.2552
Subject(s) - capital asset pricing model , predictability , momentum (technical analysis) , beta (programming language) , economics , econometrics , financial economics , stock (firearms) , estimator , trading strategy , mathematics , statistics , computer science , geography , archaeology , programming language
This paper demonstrates that the forecasted capital asset pricing model (CAPM) beta of momentum portfolios explains a large portion of the return, ranging from 40% to 60% for stock‐level momentum, and from 30% to 50% for industry‐level momentum. Beta forecasts are from a realized beta estimator using daily returns over the prior year. Periods such as 1969–1989 have been found in earlier studies to contain abnormal profits from momentum trading; however, we show that these were spuriously generated by measurement error in systematic risk. These results cast further doubt on the ability of standard momentum trading strategies to generate abnormal profits.