Market States and Momentum

Author(s): MICHAEL J.COOPER,ROBERTO C.GUTIERREZ JR, ALLAUDEEN HANMEED

Abstract: We test overreaction theories of short-run momentum and long-run reversal in the cross section of stock returns. Momentum profits depend on the state of the market,as perdicted.From 1929 to 1995,the mean monthly momentum profit following positive market returns is 0.93%,whereas the mean profit following negative market returns is -0.37%. The up-Market momentum reverses in the long-run.Our results are robust to the conditioning information in macroeconomic factors.Moreover, we find that macroeconomic facrors are unable to explain momentum profits after simple methodlogical adjustments to take accout of microstructure conderns.

Cooper, Gutierrez, Hameed 2004.pdf