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What Does the Cross‐Section Tell About Itself? Explaining Equity Risk Premia with Stock Return Moments

I propose a new risk-based explanation of momentum. I derive a simple two-factor asset pricing model, which contains the market return and stock return dispersion (RD) as risk factors. This model offers a large fit for portfolios sorted on momentum and industry momentum, with cross-sectional R^2 estimates around 80%. Past losers are more positively correlated with return dispersion, which earns a negative price of risk, and hence the lower risk premia earned by those stocks. The model compares favorably with some of the most popular multifactor models in the literature, and also helps explaining the earnings momentum and profitability anomalies.