Pricing Within And Across Asset Classes
When an asset-pricing model is claimed to explain a cross-section of portfolio returns, it should do so both within one asset class and across different asset classes. This paper illustrates that this is not always the case using the CAPM and Asness, Moskowitz and Pedersen (AMP, 2013) models applied to momentum and value portfolio returns as examples. Apparently, on one hand, the CAPM is almost as good as the AMP model in explaining the portfolio returns across asset classes, but on the other hand, the AMP model is almost as bad as the CAPM in explaining these returns within one asset class.
The aim of this article is to prove the evidence of cross sectional momentum effect in Russian stock market within the variety of momentum strategy design elements and disclosure of the momentum effect nature.
Our research is devoted to trade strategy’s profits and study of financial anomalies in stocks pricing. We analyze Momentum (and Reversal) strategies construction that is based on historical prices of assets. The main feature of the momentum strategy is that past stocks relative return (higher or lower than mean return or benchmark set) is used for selecting assets in portfolio.
The accent in our paper is made on revealing the nature of momentum and reversal (or contrarian) effects over time periods up to one year through the analysis of two basic determinants of abnormal profits of arbitrage portfolios of different design: cross-sectional variance of mean returns (rational explanation) and time-series predictability of asset returns (irrational explanation according EMH). The analyzed period embraces, from January 2006 to December 2014. Our research of Russian stock market has shown that, considering the choice of portfolio design (temporal windows for selecting stocks for portfolio and investment, and weight of stocks in the portfolio) and stock sample for constructing strategies (the sample should include major companies with liquid stocks) momentum and reversal effects do take place. Momentum profit is demonstrated in short-term strategies (3 to 6 months), while reversal effect is marked for ultra-short (less than a month) and long periods (11–12 months). Profit decomposition shows that the component responsible for rational explanations is statistically significant and its weight prevails in most momentum strategies with investment period not exceeding 9 months.