Extensive research has been dedicated to the momentum effect in the past two decades since it was first documented in 1993 by Jegadeesh and Titman. Put simply, momentum can be understood as persistence in relative stock performance: stocks which have performed well over the past three to twelve months continue to outperform stocks which have performed poorly over the next three to twelve months.
The aim of this paper is to gather, compare and evaluate the available evidence so far to show that momentum is effective globally, with a focus on analyzing co-movement. Besides the geographical dimension, the paper will also look at the extent to which profitable momentum returns are prevalent in time 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 pervasiveness of the momentum effect along three dimensions: geographical, temporal and across asset classes.
Table of Contents
Introduction
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
Research Objective and Topics
The primary objective of this paper is to gather, compare, and evaluate existing academic evidence to demonstrate the global pervasiveness of the momentum effect, with a specific focus on analyzing co-movement across geographical dimensions, asset classes, and time.
- Global momentum returns in stock markets
- Co-movement and correlations between international markets
- Momentum persistence across non-stock asset classes
- Temporal evolution and stability of the momentum effect
- Assessment of global vs. local factors driving momentum
Excerpt from the Book
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. The common practice used in most research 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 stocks 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. Therefore, 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 returns 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. It can be seen that stocks in all continents exhibit momentum, all returns 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, Malaysia, Taiwan, Indonesia, Philippines - momentum returns were found to be insignificant.
Summary of Chapters
Introduction: This section establishes the research motivation by defining the momentum effect and outlining the paper's focus on the geographical, temporal, and asset-class dimensions of the anomaly.
1. The pervasiveness of the momentum effect globally: This chapter analyzes momentum returns across international stock markets and discusses various methods, such as correlations, used to determine if these returns are driven by global or country-specific factors.
2. The pervasiveness of the momentum effect across asset classes globally: This chapter extends the analysis beyond individual stocks to include other asset classes like currencies, commodities, and government bonds, highlighting their interconnectedness.
3. The pervasiveness of the momentum effect in time: This chapter examines the evolution of momentum returns over various time periods, assessing the stability of the effect and its performance during different market conditions.
Keywords
Momentum effect, global financial markets, asset pricing, co-movement, market anomalies, stock performance, emerging markets, non-stock assets, momentum strategies, Sharpe ratio, temporal evolution, financial integration, market efficiency, investment returns, behavioral finance.
Frequently Asked Questions
What is the central focus of this paper?
The paper examines the global pervasiveness of the momentum effect, analyzing whether this financial anomaly is a universal phenomenon or limited to specific regions or assets.
What are the primary themes discussed?
The work explores three main dimensions: the geographical consistency of momentum, its presence across different asset classes, and its stability over time.
What is the main research question?
The research asks whether excess momentum returns are country-specific or driven by common global factors, and to what extent these strategies persist across different economic conditions.
Which methodology is employed in the study?
The author performs a comprehensive literature review, comparing academic findings, analyzing correlations between international market returns, and evaluating various asset pricing models and statistical evidence.
What topics are covered in the main section of the paper?
The main sections detail momentum performance in developed and emerging stock markets, evaluate co-movement methods, investigate non-stock asset classes, and analyze the evolution of momentum returns throughout different time periods.
Which keywords best characterize this study?
Key terms include momentum effect, co-movement, global markets, asset classes, financial anomalies, and market integration.
Why are emerging markets often excluded or show insignificant momentum?
Emerging markets frequently show insignificant momentum due to isolated capital markets, restrictions on foreign investment, and lower data availability compared to developed economies.
Does momentum perform differently in bull or bear markets?
Surprisingly, evidence suggests that momentum returns can be higher during periods of market distress and negative GDP growth, indicating that the effect is not negatively impacted by economic volatility.
- Quote paper
- Andra Musat (Author), 2015, Momentum Around the Globe. The Pervasiveness of the Momentum Effect in Relative Stock Performance, Munich, GRIN Verlag, https://www.grin.com/document/300156
