Determinants of Momentum: A Perspective From International Data

Abstract

There is yet no consensus on why equity markets permit momentum although the literature proposes several rationales that have been empirically tested with US data. We use out-of-sample international data to assess the robustness of these rationales. We find that the frog-in-the-pan (FIP) hypothesis, which posits that investors underreact to information that arrives gradually rather than in concentrated doses, consistently wins. Also, internationally, momentum is stronger in less volatile markets and in up-markets. Information flows more gradually during these market states, implying additional support for FIP.

Keywords: momentum; information diffusion, market efficiency

JEL Classification: G12,G14