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Is default risk the hidden factor in momentum returns? Some empirical results

Abinzano Guillén, María Isabel; Muga Caperos, Luis Fernando; Santamaría Aquilué, Rafael

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Abstract

This is the peer reviewed version of the following article: Abinzano, I., Muga, L. and Santamaria, R. (2014), Is default risk the hidden factor in momentum returns? Some empirical results. Account Finance, 54: 671–698, which has been published in final form at doi:10.1111/acfi.12021. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving. ; This paper analyzes the role of default risk in the momentum effect focusing on data from four developed European stock markets (France, Germany, Spain and the United Kingdom). Using a market-based measure of default risk, we show that it is not the hidden factor behind this effect. While the loser portfolio is characterized by high default risk, small size, high BTM and illiquidity, characterization of the winner portfolio is somewhat more complex. Given that the momentum strategy is the return differential between the winners and the losers, factors such as the stock market cycle or the evolution of momentum portfolios against their reference point make momentum profits difficult to forecast. ; This paper has received financial support from the Spanish Ministry of Science and Innovation (ECO2009-12819) and the Ministry of Economy and Competitiveness (ECO2012-35946-C02-01). Isabel Abinzano particularly acknowledges the financial support of the Andalusian Regional Government (P09-SEJ-4467).

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