We study dynamic portfolio choice in a calibrated equilibrium model where value and momentum anomalies arise because capital slowly moves from under- to over-performing market segments. Over short horizons, momentum’s Sharpe ratio exceeds value’s, the value-momentum correlation is negative, and the conditional value-momentum correlation positively predicts Sharpe ratios of value and momentum. In contrast, over long horizons, value’s Sharpe ratio can exceed momentum’s, the value-momentum correlation turns positive, and the value spread becomes a better predictor of Sharpe ratios. Momentum’s optimal portfolio weight relative to value’s declines significantly as horizon increases. We provide novel empirical evidence supporting our model’s predictions.
