Is There Evidence for Momentum and Mean Reversion in Asset Class Returns?

Abstract

The presence of momentum and mean reversion effects in returns at the asset class level are often postulated or presumed. This note aims to provide a simple measurement of these effects from historical data. The results suggest that fixed income assets show short and long horizon momentum effects, while equities show short term momentum and long term mean reversion. However, only a small subset of the momentum effects seem significant, at very short horizons and with small absolute effect sizes. The measurement of long horizon mean reversion is greatly impaired by the small number of independent periods that are available, even in a relatively long data series.

Keywords: correlation, momentum, mean reversion, asset allocation