Abstract
Winner stocks have higher risk exposure to Fama and French's (1993) three factors (FF3F) than loser stocks during good economic times, and therefore should earn higher expected returns. Employing the conditional FF3F model to risk adjust returns on winner and loser stocks can reduce the average momentum alpha by 50\% compared to the conventional portfolio-level estimate. We point out a bias in the existing methodology of component-level risk adjustment. After correcting for this bias, even though conditional asset pricing models still cannot completely explain momentum returns, the reduction in alpha remains strong.
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