Business cycle, expected return and momentum payoffs

Abstract

This paper applies the concept of time-varying risk premium at firm level and examines whether business cycles affect each firm differently. To this end, we use macroeconomic variables to predict expected returns at firm level and attempt to explain momentum payoffs. Our empirical results show past winners tend to have higher expected returns while past losers have lower expected returns predicted by macroeconomic variables. Also, discount rates of winners are likely to move downward while those of losers move upward contrarily. Therefore, we confirm cross-sectional differences in expected returns and their variation through time can contribute to momentum payoffs.