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Market States and Momentum

Michael J. Cooper, Roberto C. Gutierrez Jr. and Allaudeen Hameed
The Journal of Finance
Vol. 59, No. 3 (Jun., 2004), pp. 1345-1365
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/3694739
Page Count: 21
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Market States and Momentum
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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 predicted. 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 factors are unable to explain momentum profits after simple methodological adjustments to take account of microstructure concerns.

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