Cross-sectional factor dynamics and momentum returns

We develop a structural model where joint dynamics of aggregate consumption and asset specific dividends are governed by correlated state variables. The correlation structure implies distinct cross-sectional exposures of dividends to a long history of consumption growth rates, resulting in variation of consumption beta. Such variation rationalizes momentum crashes per Daniel and Moskowitz (2016), as the consumption beta of the Winner portfolios remain low after the economy recovers from a downturn, while the consumption beta of the Loser portfolios grow quickly. Thus, emerging from a recession, the consumption beta of the momentum strategy decreases, and so does risk premia. (C) 2017 Elsevier B.V. All rights reserved.