Market States and Momentum
38 Pages Posted: 12 Feb 2002
Date Written: 2003
We test overreaction theories of short-run momentum and long-run reversal in the cross section of stock returns. Momentum profits depend on the state of the market, as predicted. From 1929 to 1995, the mean monthly momentum profit following positive market returns is 0.93 percent, whereas the mean profit following negative market returns is negative 0.37 percent. The up-market momentum reverses in the long-run. Our results are robust to the conditioning information in macroeconomic factors. Moreover, we find that macroeconomic factors are unable to explain momentum profits after simple methodological adjustments to take account of microstructure concerns.
Note: Previously titled "Market States and the Profits to Momentum and Contrarian Strategies"
Keywords: Momentum, Reversals, Behavioral Theories
JEL Classification: G14, G12
Suggested Citation: Suggested Citation