What Explains Momentum? A Perspective From International Data

69 Pages Posted: 20 Jan 2022 Last revised: 13 Apr 2022

See all articles by Amit Goyal

Amit Goyal

University of Lausanne; Swiss Finance Institute

Narasimhan Jegadeesh

Emory University - Department of Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Date Written: January 19, 2022

Abstract

There is as yet no consensus on why equity markets permit momentum, although the literature
proposes several explanations. Our analysis uses out-of-sample international data
to consider a “horse race” across existing empirical proxies for momentum rationales used
by earlier studies. Our central finding in cross-sectional analyses is that the proxy for the
frog-in-the-pan (FIP) hypothesis, which posits that due to limited attention, 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.
The FIP proxy indicates that information flows more gradually during these market states,
implying additional support for the hypothesis.

Keywords: momentum; information diffusion, market efficiency

JEL Classification: G12,G14

Suggested Citation

Goyal, Amit and Jegadeesh, Narasimhan and Subrahmanyam, Avanidhar, What Explains Momentum? A Perspective From International Data (January 19, 2022). Available at SSRN: https://ssrn.com/abstract=4012902 or http://dx.doi.org/10.2139/ssrn.4012902

Amit Goyal

University of Lausanne ( email )

Batiment Extranef 226
Lausanne, Vaud CH-1015
Switzerland
+41 21 692 3676 (Phone)
+41 21 692 3435 (Fax)

HOME PAGE: http://www.hec.unil.ch/agoyal/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Narasimhan Jegadeesh

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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