| The Fama French Three Factor model for financial assets has been shown to explain almost all market "anomalies" with a single exception. Short-term asset return continuation (price momentum) is not explained by the three-factor model. The intercept term from this model, alpha, can be viewed as a catch-all proxy for "unknown" extra risk return not captured by the model's common "known" risk factors. Alpha may contain a proxy for the risk of short-term price continuation of an asset assigned by investors (premium or discount valuation), known as price momentum.;Short-term price momentum within the process of long-term return reversal is documented in financial research. An investor holding an appreciating asset, in the short-run, is expecting a risk premium (alpha) for holding an asset expected to decline in the long-run, and vice versa. This dissertation shows that the short-term change in alpha (extra-risk momentum) is itself a significant fourth risk factor. Alpha momentum captures the short-term asset return continuation not modeled in the known risk factors of the three-factor model. Those willing to accept the "alpha risk" can use the model to increase portfolio returns. Additionally, there appear to be some cross-sectional dependencies between size and alpha momentum. The main contribution of this dissertation is providing a possible fourth independent variable to be added to the Fama French model that addresses the deficiency of the model to explain short-term asset return continuation and provides a signal for extra-risk returns not captured by the Fama French model. |
