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

Abínzano, Isabel; Muga, Luis; Santamaria, Rafael

doi:10.1111/acfi.12021

Cited by 11 publications

(16 citation statements)

References 48 publications

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“…Second, and more importantly, we use the same testing strategy in order to see whether default risk is a potential explanation for the momentum effect. Our results shed some light on this controversy by confirming the conclusions reached by Abinzano et al (2014) and enabling us to conclude that default risk is not the source of momentum returns, given that the predictable component of returns manifests itself differently in each case: as jumps in the case of default risk and as continuous returns in that of momentum.…”

Section: Introductionsupporting

confidence: 83%

“…In particular, we study the origin of momentum returns and its relation with default risk, which is the most innovative aspect of this paper. While Avramov, Chordia, Jostova, and Philipov (2007) and Agarwal and Taffler (2008), using different default risk proxies, conclude that default risk is the key variable to explain the momentum effect, Abinzano, Muga, and Santamaria (2014) find no empirical support for this claim. They identify default risk as simply one more characteristic of the loser portfolio, which lacks sufficient explanatory power, on its own, to account for total return.…”

Section: Introductionmentioning

confidence: 93%

“…Finally, following Vassalou and Xing (2004) and Abinzano et al (2014), we use the Black-Scholes-Merton (BSM) measure as a proxy for default risk. We use this measure instead of the credit rating because there is no available credit rating for several stocks in the Spanish stock market and a firm's credit worthiness can vary substantially before its credit rating is readjusted.…”

Section: Data and Preliminary Analysismentioning

confidence: 99%

“…More recently, Avramov et al (2007) used US stock market data to show that momentum strategies will only achieve significant profits if strategies are constructed from low credit rating stocks, while Agarwal and Taffler (2008), using UK stock market data, concluded that the momentum effect is a direct consequence of market under-reaction to distress risk. However, Abinzano et al (2014), using a market-based measure of default risk based on the Black-Scholes-Merton option-pricing model in four key European stock markets (France, Germany, Spain and the UK) find that default risk is not necessarily a characteristic of momentum strategies and cannot therefore explain momentum returns.…”

Section: Jumps Momentum and Default Riskmentioning

confidence: 99%

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Momentum and default risk. Some results using the jump component

González‐Urteaga

Muga

Santamaria

2015

International Review of Financial Analysis

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a b s t r a c tIn this paper we separate the total stock return into its continuous and jump component to test whether stock return predictability should be attributed to omitted risk factors or behavioral finance theories. We extend results from the US market to the Spanish stock market, which, despite being a developed market, presents several differences in terms of stock characteristics, financial system, investor typology and cultural dimensions. The results show that the jump component has significant explanatory power for the premium of three characteristics (size, book-to-market and illiquidity), which is at odds with risk-based explanations. Using the same testing strategy, we try to shed some light on an important controversy concerning the relationship between default risk and momentum. The results suggest that default risk is not the source of momentum returns.

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Section: Introductionsupporting

confidence: 83%

Section: Introductionmentioning

confidence: 93%

Section: Data and Preliminary Analysismentioning

confidence: 99%

Section: Jumps Momentum and Default Riskmentioning

confidence: 99%

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Momentum and default risk. Some results using the jump component

González‐Urteaga

Muga

Santamaria

2015

International Review of Financial Analysis

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“…This risk is very important for insurance companies in Ukraine to cover. Default risk of reinsurer was reflected in the works [15][16].…”

Section: Brief Literature Reviewmentioning

confidence: 99%

Improvement of the methodology for assessing the capital adequacy to cover the reinsurance default risk

Pukała¹,

Vnukova²,

Achkasova³

et al. 2017

EA-XXI

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Abstract. Introduction. The development of the insurance market in Ukraine is closely associated with the instruments used by domestic insurers to manage low capitalisation, including coinsurance and reinsurance services. Reinsurance helps insurance companies to take very large and expensive risks. Thus, the questions of generalisation of both national and international experience in default risk assessment of reinsurers in an insurance company and provision of recommendations to ensure reliability of activity of insurance companies are relevant. The purpose of the paper is to provide recommendations to improve capital adequacy assessment concerning the coverage of the reinsurance default risk. Methodology. The methodological basis of this study is the theory of insurance and insurance concepts. Scale measurement of capital adequacy of insurance companies relevant to the coverage of the reinsurance default risk was conducted by using methods of mathematical statistics. Results. Based on the example of 50 Ukrainian insurance companies, we have conducted scale measurement of capital adequacy to cover the default risk of reinsurers for the years of 2015-2016. The originality of the research lies in the improvement of capital adequacy assessment concerning the coverage of the reinsurance default risk, which, unlike the existing methodology, considers the designed scale and criteria of the capital adequacy indicator of the insurance company to cover the reinsurance default risk at «inadequate», «adequate», «medium», «good» and «excellent» levels. Conclusions. The practical value of the paper lies in the proposed approaches to improve capital adequacy assessment concerning the coverage of the reinsurance default risk, which will enhance the level of reinsurance and facilitate the fulfillment of obligations by insurance companies. Keywords: Reinsurance Default Risk; Methodology; Scale Measurement; Capital Adequacy; Insurance Company JEL Classification: F36; F38; F65; G22; G28 DOI: https://doi.org/10.21003/ea.V165-30 Пукала Р. кандидат економічних наук, проректор у справах студентів, Ярославська державна вища техніко-економічна школа ім. Броніслава Маркевича, Ярослав, Польща Внукова Н. М. доктор економічних наук, професор, завідувач кафедри управління фінансовими послугами, Харківський національний економічний університет імені Семена Кузнеця, Харків, Україна Ачкасова С. А. кандидат економічних наук, доцент, кафедра управління фінансовими послугами, Харківський національний економічний університет імені Семена Кузнеця, Харків, Україна Смоляк В. А. кандидат економічних наук, доцент, кафедра управління фінансовими послугами, Харківський національний економічний університет імені Семена Кузнеця, Харків, Україна Удосконалення методики оцінки достатності капіталу на покриття ризику дефолту перестраховика Анотація. У статті удосконалено методику оцінки достатності капіталу на покриття можливих збитків у разі настання ризику дефолту перестраховика, яка, на відміну від існуючих, враховує розроблені шкали та критерії для показни...

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Enhancing momentum investment strategy using leverage

Forner

Muradoğlu

Sivaprasad

2018

Journal of Forecasting

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Previous studies examine investment strategies based on leverage and momentum; none investigates both variables jointly as an investment strategy. This paper is the first incorporating leverage and momentum together. We show that low past returns (losers) forecast future negative abnormal returns only among stocks with high leverage levels, but not among stocks with low leverage levels. However, high past returns (winners) forecast future positive abnormal returns independently of leverage level. As a result, the negative relation between leverage and future abnormal returns is only observed among loser stocks, and the positive relation between past returns and future abnormal returns is only shown among non‐low leverage stocks. Our results are important in achieving better investment strategies: buying winners' stocks (independently of their level of leverage) and short‐selling losers' stocks with high leverage yield higher abnormal returns than strategies based on only one of these variables. Our two‐dimensional strategy yields risk‐adjusted abnormal returns of 15.66% per annum, whereas the single leverage or momentum strategies yield 7.70% and 7.96% per annum, respectively. The difference is nearly 8% and economically significant. If leverage is considered as proxy for default risk, our results, contrary to previous evidence, show that momentum profits are not exclusive of default stocks, and that momentum returns are not only driven by negative returns yielded by distress stocks.

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

Cited by 11 publications

References 48 publications

Momentum and default risk. Some results using the jump component

Momentum and default risk. Some results using the jump component

Improvement of the methodology for assessing the capital adequacy to cover the reinsurance default risk

Enhancing momentum investment strategy using leverage

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