Market Cycles and the Performance of Relative-Strength Strategies
Financial Management 2013, V42, Pages 263-290
Posted: 8 Oct 2011 Last revised: 2 Jul 2013
Date Written: June 28, 2013
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.
Keywords: Medium-Run Momentum, Long-Run Reversals, Mean Stock Returns
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation