Macromomentum: Returns Predictability in Currencies and International Equity Indices

Abstract

This study examines momentum and reversals in currencies and international equity market indices. We find momentum in country equity market indices during the first year after the portfolio formation date and reversals during the subsequent two years. We also find momentum in currencies up to three years after the portfolio formation date but no reversals. Positive currency momentum predicts low stock index returns in the future weakening momentum and strengthening reversals in U.S. dollar-denominated stock index returns. Additional tests show that countries with positive (negative) equity momentum experience declining (increasing) nominal federal fund rates in the first year after portfolio formation date and increasing (decreasing) interest rates in the subsequent two years. We discuss the implications of our findings for rational and behavioral theories.