Momentum profits and conditional time-varying systematic risk

The predictability of security prices and the ability to develop profitable trading strategies is of great interest in the financial world. This paper examines momentum profits over the period January 1980 to December 2010 in the UK stock market, and attempts to explain whether such profits can be attributed to time-varying systematic risk based upon the conditional CAPM. Time-varying betas are estimated from time-varying conditional variances and covariances, where conditional information is incorporated by modelling variances and covariances using ARCH, GARCH and GARCH-M models. For the majority of momentum trading strategies winner portfolios show higher systematic risk than loser portfolios, and in some cases this difference is found to be statistically significant.