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Uncertainty, Momentum, and Profitability

Claire Y.C. Liang, Zhenyang (David) Tang and Xiaowei Xu
The Journal of Portfolio Management April 2019, 45 (4) 91-104; DOI: https://doi.org/10.3905/jpm.2019.1.085
Claire Y.C. Liang
is an assistant professor of finance at Southern Illinois University in Carbondale, IL
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Zhenyang (David) Tang
is an assistant professor of finance at Clark University in Worcester, MA
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Xiaowei Xu
is an assistant professor of finance at University of Rhode Island in Kingston, RI
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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.

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The Journal of Portfolio Management: 45 (4)
The Journal of Portfolio Management
Vol. 45, Issue 4
April 2019
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Uncertainty, Momentum, and Profitability
Claire Y.C. Liang, Zhenyang (David) Tang, Xiaowei Xu
The Journal of Portfolio Management Mar 2019, 45 (4) 91-104; DOI: 10.3905/jpm.2019.1.085

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Uncertainty, Momentum, and Profitability
Claire Y.C. Liang, Zhenyang (David) Tang, Xiaowei Xu
The Journal of Portfolio Management Mar 2019, 45 (4) 91-104; DOI: 10.3905/jpm.2019.1.085
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  • Article
    • Abstract
    • UNCERTAINTY EXPLAINS MOMENTUM AND PROFITABILITY
    • IVOL/DISP EXPLAINS MOMENTUM AND PROFITABILITY
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
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