PT  - JOURNAL ARTICLE
AU  - Claire Y.C. Liang
AU  - Zhenyang (David) Tang
AU  - Xiaowei Xu
TI  - Uncertainty, Momentum, and Profitability
AID  - 10.3905/jpm.2019.1.085
DP  - 2019 Mar 05
TA  - The Journal of Portfolio Management
PG  - jpm.2019.1.085
4099  - https://pm-research.com/content/early/2019/03/06/jpm.2019.1.085.short
4100  - https://pm-research.com/content/early/2019/03/06/jpm.2019.1.085.full
AB  - 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.