Do Countries or Industries Explain Momentum in Europe?
EFA 2002 Berlin Meetings Presented Paper
45 Pages Posted: 1 Mar 2002
Date Written: 28 2002, 10
The driving force behind the well-documented medium term momentumeffect in stock returns is subject of much debate. Empirical papersthat aim to find the determinants of this return continuation, seem tobe almost exclusively restricted to US stock markets. Consequently,regional effects have received little attention in these analyses.This paper contributes to the discussion by investigating the presenceof country and industry momentum in Europe and addressing the questionwhether individual stock momentum is subsumed by country or industrymomentum.We examine these issues by introducing a portfolio-basedregression approach, which allows to test hypotheses about theexistence and relative importance of multiple effects using standardstatistical techniques. While the traditional sorting techniques arenot suited to disentangle a multitude of possibly interrelated effects(e.g. momentum, value, and size), our method can be used even whenonly a moderate number of stocks are available. Our results suggestthat the positive expected excess returns of momentum strategies inEuropean stock markets are primarily driven by individual stockseffects, while industry momentum plays a less important role andcountry momentum is even weaker. These results are robust to theinclusion of value and size effects.
Keywords: country risk, industry risk, momentum effect, portfolio selection, technology adoption
JEL Classification: M, M41, G3, G11, G14, G15
Suggested Citation: Suggested Citation