Cross-Country Composite Momentum

Abstract

We demonstrate that firm-specific momentum profits are predictable across a wide range of international equity markets when combining information given in a multitude of stock characteristics. This predictor is comparatively simple to compute and can yield significant positive out-of-sample long-short portfolio returns. Cross-country analyses reveal that both, ordinary and composite-enhanced momentum returns tend to be higher within countries that exhibit less trading frictions and markets that exhibit less information opaqueness. Simultaneously, we find composite-enhanced momentum returns to be higher in highly individualistic countries that simultaneously exhibit smaller degrees of power distance. Overall, we interpret reported findings as empirical support for overreaction-based explanations of (composite-enhanced) momentum.

Keywords: momentum profits, stock characteristics, market efficiency, international stock markets

JEL Classification: G12, G14