The Momentum Premium: An Intermediary Asset Pricing Perspective

Abstract: We attempt to explain the momentum premium using time-varying risk under the frictions of financial intermediation. Our conditional CAPM model reveals positive covariation between momentum's beta and the expected market risk premium. Consistent with observed time-varying risk-return trade-off, our periodic regressions reduce the alpha significantly. To capture the impact of financial intermediation we add two fund flow variables finding that consumer deposits and withdrawals into mutual funds affects momentum. Our paper offers a novel empirical finding that the momentum anomaly is at least in part driven by risk premium related to intermediaries' financing constraints.