Momentum, Business Cycle, and Time-varying Expected Returns


  • Tarun Chordia,

  • Lakshmanan Shivakumar

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    • Tarun Chordia is from the Goizueta Business School, Emory University and Lakshmanan Shivakumar is from the London Business School. We thank Ray Ball, Mark Britten-Jones, Jeff Busse, Josh Coval, Gene Fama, Mark Grinblatt, David Hirshleifer, Paul Irvine, Narasimhan Jegadeesh, Gautam Kaul, S. P. Kothari, Toby Moskowitz, Avanidhar Subrahmanyam, Bhaskaran Swaminathan, Sheridan Titman, and seminar participants at the London Business School, Vanderbilt University, Mitsui Life Accounting and Finance Conference, WFA 2000 meetings, EFA 2000, EFMA 2000, and the AFA 2001 meetings for helpful comments. We also thank Rick Green (editor) and an anonymous referee for valuable suggestions. The second author was supported by the Dean's Fund for Research at the London Business School. All errors are our own.


A growing number of researchers argue that time-series patterns in returns are due to investor irrationality and thus can be translated into abnormal profits. Continuation of short-term returns or momentum is one such pattern that has defied any rational explanation and is at odds with market efficiency. This paper shows that profits to momentum strategies can be explained by a set of lagged macroeconomic variables and payoffs to momentum strategies disappear once stock returns are adjusted for their predictability based on these macroeconomic variables. Our results provide a possible role for time-varying expected returns as an explanation for momentum payoffs.