Momentum Dynamics in U.S. Valuation Ratios

35 Pages Posted: 27 Jan 2004

See all articles by Ana-Maria Fuertes

Ana-Maria Fuertes

Cass Business School, City University of London

Jerry Coakley

University of Essex - Essex Business School

Date Written: January 2004

Abstract

We divide the time series of aggregate valuation into bull and bear market phases to test for momentum and reversal, respectively. Our results are consistent with price-earnings and price-dividends displaying continuation by drifting upwards in bull markets irrespective of fundamentals. Such persistence can be explained by market sentiment but not within a classical framework. However the link to fundamentals is restored in bear markets where valuation ratios exhibit mean reversion toward their long run equilibrium levels and thus overall stationarity. Finally, impulse response functions indicate that shocks to the ratios typically follow an underreaction-overreaction time profile that is more pronounced in bull rather than bear markets.

Keywords: Behavioral finance, underreaction-overreaction, threshold autoregression

JEL Classification: C40, G12

Suggested Citation

Fuertes, Ana-Maria and Coakley, Jerry, Momentum Dynamics in U.S. Valuation Ratios (January 2004). Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=493423 or http://dx.doi.org/10.2139/ssrn.493423

Ana-Maria Fuertes

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

Jerry Coakley

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom
+44 1206 872455 (Phone)
+44 1206 873429 (Fax)

HOME PAGE: http://www.essex.ac.uk/afm/staff/coakley.shtm

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