Momentum Around the Globe. The Pervasiveness of the Momentum Effect in Relative Stock Performance

Seminar Paper 2015 16 Pages

Business economics - Banking, Stock Exchanges, Insurance, Accounting


Table of Contents

List of figures and tables


1. The pervasiveness of the momentum effect globally
1.1. Emerging markets
1.2. Methods to examine co-movement
1.2.1. Correlations
1.2.2. Other methods

2. The pervasiveness of the momentum effect across asset classes globally

3. The pervasiveness of the momentum effect in time



List of figures and tables

Figure 1: Average monthly momentum returns in the USA for different time periods

Figure 2: Average monthly momentum returns in Europe for different time periods

Table 1: Average monthly momentum returns in international stock markets

Table 2: Average monthly momentum returns in nonstock asset classes


Extensive research has been dedicated to th e momentum effect in the p ast two decad es since it wa s first docum ented in 1993 b y Jegadeesh and Titman. Put simply, momentum can be und erstood as persistence in relative stock performance: stocks which hav e performed well over the past three to twelve months continue to outperform stocks which have performed poorly over the next three to twelve months. Because the momentum effect is an anomaly which challenges the efficient market hypothesis, several explanations have been proposed ran ging from data mining , behavioral patterns and risk -based theories. While the impressive amount of research carried out so far has not yet managed to come up with a full y-satisfactory explanation, it has ho wever succeeded to de monstrate that the momentum effect is pervasive globally, being observed in every corner around the world, with only a few exceptions. The academic studies have only recently started to switch from analyzing momentum returns in only one market/region to looking at the big global picture. The possibility that these recent results can indicate a common global root for momentum and shed light on a-much-waited-for rational or behavioral explanation is what has driven my motivation for the literature review concerning this paper.

Consequently, the aim of this paper is to gather, compare and ev aluate the avail able evidence so far to show t hat momentum is effective globally, with a focus on analyzing comovement. Besides the g eographical dimension, the paper will also look at the extent t o which profitable momentum re turns are prevalent in t ime and are not only confined to stocks, but are characteristic for much more asset classes. As such, the main contribution of the paper is the brief analysis of the perva siveness of th e momentum effect along three dimensions: geographical, temporal and across asset classes.

The paper is or ganized as follows : Section 1 will show that momentum profits are significantly positive all around the g lobe, with a noteworth y mention in wha t regards emerging markets. The biggest part o f this section is concern ed with examining comovement in momentum returns across countries, inventorizing several methods employed by the researchers to a scertain it. Section 2 will investigate momentum in other asset classes besides stocks a nd look for correlations among them. Finally, Section 3 take s a chronological stand: it inspects the evolution in time of momentum r eturns and their correlations across countries, assessing how stable and prevalent they have been in different time periods.

1. The pervasiveness of the momentum effect globally

The momentum effect phenomenon can be observed over a medium term horizon, meaning over a period ranging from 3 to 12 months. Th e common pr actice used in most re search articles is to use 6-month periods and a simple momentum strategy works as follows: based on stock returns for the past 6 months, the sto cks are ranked, the top x% (most articles use deciles, but 5% and 20% breakpoints are also used) are the Winner stocks, while the bottom x% are the Loser stocks. Next, over a further 6-month period, the Winners are held and the Losers are sold short. There fore, the monthly momentum return is the difference in returns between the Winner and Loser portfolios and all returns reported throughout this paper are such monthly momentum returns.

Table 1 reports average monthly momentum re turns for various regions across the globe, using more recent sample data from the past two decades. The sample period of the stocks for the respective region is reported in parentheses.

illustration not visible in this excerpt

Table 3: Average monthly momentum returns in international stock markets1

It can be se en that stocks in all continents ex hibit momentum, all re turns reported in the table being significantly positive. However, when looking at individual countries it is worth noting that for Japan and for some other Asian countries - South Korea, Mala ysia, Taiwan,

Indonesia, Philippines - momentum returns were found to be insignificant.2 The reason for which the Asia Pa cific region has a reported large significant momentum return of 0.69% per month on average is twofold: Japan was excluded and the average is heavil y driven by the large market capitalization of Hong Kong.

In what regards Europe, the countries which were most often identified in different articles with momentum returns of over 1% per mont h are: Ireland, Netherlands and Luxembourg. The Scandinavian countries, on the other hand, do not seem to have significant momentum returns, according to several studies.3

illustration not visible in this excerpt

Figure 3: Average monthly momentum returns in the Figure 4: Average monthly momentum returns in

USA for different time periods4 Europe for different time periods5

Since the majority of academic studies investigating momentum have focused on the US A and Europe, becaus e they have the most developed capital markets, the two figures above plot the results of some of these studies for the various sample periods. For the USA it can be noticed that the mor e recent the sample data is, the lowe r the observed momentum returns are. The returns have dropped from an average of 0.95% in the 1965-1989 period to as low as 0.45% over the 1972-2011 period. Th e tendency of the momentum eff ect to become weaker lately, observed on the USA ma rket, is howe ver not mir rored in Europ e. Here the monthl y momentum returns vary from 0.68 to 0.93, a much narrower range than for the USA, but they do not seem to exhibit any particular time pattern. The time variation of the momentum effect globally is going to be discussed in more detail in Section 3.

1.1. Emerging markets

While for the develop ed world momentum has been strong and persistent for the p ast decades, this does not hold true for the emerging economies. First of all , here momentum returns are rarely significant: out of 16 analyzed emerging economies only Mexico, Russia, South Africa and Thailand were found to h ave significant returns.6 An o lder study also finds significant momentum returns in only 6 out of the 20 emerging markets.7

When comparing the m agnitude of the moment um effect in emerg ing countries to the developed world, the evidenc e is inconclusive. Some older studies find o n average weaker momentum profits in emerging economies.8 A more recent article reports by contrast higher momentum returns in developing countries as compared to developed ones (0.92% versus 0.62% per month), arguing that the results should not be puzzling if taken into account that for emerging countries the sample of stocks is much more reduced and their volatility very much inflated.9

1.2. Methods to examine co-movement

Once that it has be en shown that the momentu m effect can be observed in countries all around the world, the question that remains to be answered is whether the excess returns are country-specific, or rather driven by common global factors. As the next section is going to show, the majority of the evidence points towards the latter.


1 Data compiled from Kyung-In and Dongcheol (2014, p. 579), Fama and French (2012, p. 461), Griffin et al. (2005, p. 25).

2 Cf. Hong et al. (2003, p. 33).

3 Cf. Griffin et al. (2003, p. 2537), Naranjo and Porter (2010, p. 282).

4 Data compiled from Kyung-In and Dongcheol (2014, p. 579), Asness et al. (2013, p. 940), Naranjo and Porter (2010, p. 282), Rouwenhorst (1999, p. 1454), Jegadeesh and Titman (1993, p. 70).

5 Data compiled from Asness et al. (2013, p. 941), Fama and French (2012, p. 461), Griffin et al. (2005, p. 25), Griffin et al. (2003, p. 2537), Rouwenhorst (1998, p. 274).

6 Cf. Naranjo and Porter (2010, p. 280).

7 Cf. Rouwenhorst (1999, p. 1450).

8 Cf. Rouwenhorst (1999, p. 1439), Griffin et al. (2003, p. 2521).

9 Cf. Naranjo and Porter (2010, p. 286).


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momentum around globe pervasiveness effect relative stock performance




Title: Momentum Around the Globe. The Pervasiveness of the Momentum Effect in Relative Stock Performance