Macroeconomic Momentum and Cross-Sectional Equity Market

46 Pages Posted: 9 Nov 2023

See all articles by Yu Zhang

Yu Zhang

University of Reading - ICMA Centre

Konstantina Kappou

University of Reading - ICMA Centre

Andrew Urquhart

University of Reading - ICMA Centre; ICMA Centre, Henley Business School

Abstract

Momentum is a well-known and studied artefact of financial markets. In this paper, we investigate whether momentum in a country’s macroeconomic variables is related to the future performance of equities in that country. We find that the past economic trends of a country’s fundamentals are positively associated with the equity market index returns. Based on that, an economic momentum portfolio of buying (selling) equity index in countries with relatively strong (weak) economic past trends exhibits an annualised Sharpe ratio of 0.87. The economic momentum portfolio outperforms benchmarks regarding rewards to variability and maximum drawdown and yields an annualised alpha of 3.72%, leaving 95% of the returns unexplained by the benchmarks.

Keywords: Momentum, Macroeconomics, Cross-Sectional, Equity Indices

Suggested Citation

Zhang, Yu and Kappou, Konstantina and Urquhart, Andrew, Macroeconomic Momentum and Cross-Sectional Equity Market. Available at SSRN: https://ssrn.com/abstract=4627986 or http://dx.doi.org/10.2139/ssrn.4627986

Yu Zhang

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Konstantina Kappou

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 7793405682 (Phone)
+44 1189314741 (Fax)

Andrew Urquhart (Contact Author)

University of Reading - ICMA Centre ( email )

ICMA Centre, Henley Business School ( email )

University of Reading
Whiteknights
Reading, Berkshire RG6 6BA
United Kingdom

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