School of Business

Uncertainty, momentum, and profitability

Document Type

Article

Abstract

In this article, the authors argue that momentum and profitability factors share a common source in uncertainty. Specifically, the authors find that uncertainty subsumes price momentum and operating profitability; it also accounts for the majority of the profits associated with earnings momentum and return on equity, especially in large firms. Furthermore, the profits of the four aforementioned momentum/profitability strategies concentrate in periods of negative market returns, consistent with high-uncertainty stocks’ greater vulnerability to bad market states documented in recent literature. The market-state dependence of momentum/profitability strategies has significant implications for portfolio managers who attempt to profit from these strategies. Understanding the sources of the profits also helps portfolio managers better employ these factors in constructing investment portfolios.

Publication Title

Journal of Portfolio Management

Publication Date

4-1-2019

Volume

45

Issue

4

First Page

91

Last Page

104

ISSN

0095-4918

DOI

10.3905/jpm.2019.1.085

Keywords

stocks, profitability

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