Business Cycle and Momentum Payoffs

Expected returns vary over time along with business cycles. Momentum payoffs are lack of rational explanation. This paper examines how the time-varying expected returns affect each individual firm differently, and hence what the cross-sectional phenomena are. The result shows that the model based on a set of commonly used macroeconomic variables can explain momentum payoffs, implying that cross-sectional differences in expected returns as well as their variation through time can be a source of momentum payoffs.