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Market Cycles and the Performance of Relative-Strength StrategiesChristopher Todd StiversUniversity of Louisville Licheng SunOld Dominion University June 12, 2012 Financial Management, Forthcoming. Abstract: We study the effect of market cycles on both medium-run and long-run relative strength trading strategies. We find that the payoffs over both horizons tend to be relatively higher within a market state (rising or falling markets) but substantially lower when including transitions between states. Since shorter duration strategies are relatively less likely to include market transitions, our results help reconcile the puzzling fact that relative strength strategies are profitable over the medium-run but not profitable over the long-run. Our finding include that the market's cross-sectional return dispersion both: (1) tends to be higher around market-state transitions, and (2) is negatively related to the subsequent relative-strength payoffs for both horizons.
Number of Pages in PDF File: 41 Keywords: Medium-Run Momentum, Long-Run Reversals, Mean Stock Returns JEL Classification: G12, G13, G14 Accepted Paper SeriesDate posted: October 8, 2011 ; Last revised: June 28, 2012Suggested CitationContact Information
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