What Explains Momentum? A Perspective From International Data

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