International industry momentum
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Laurens Swinkels*1 is a PhD student at the CentER Graduate School of Tilburg University, The Netherlands. He is affiliated with the Research Department of ABP Investments, located in Amsterdam, The Netherlands. * Department of Econometrics and Operations Research, and CentER, Tilburg University, PO Box 90153, 5000 LE Tilburg, The Netherlands Tel: ⫹31 13 466 2134; e-mail: [email protected]
Abstract There is ample empirical evidence that the existence of return continuation at the individual stock level for the six-month horizon is not confined to US stock markets. Recently, papers have investigated the existence of this momentum effect on US industry indices. This paper examines the profitability of momentum strategies for the US, Europe and Japan using the Datastream industry classification. These findings provide further evidence in favour of the existence of industry momentum for the US and Europe. For the Japanese stock market, there is little support for the industry momentum effect, which is not surprising, since other studies claim that there is no return continuation when Japanese stocks are investigated individually. In addition, the lead-lag relation between these three regions is examined. In particular, our results confirm the leading position of the US relative to Europe on the one-year horizon, while Europe leads Japan on this horizon. Using this cross-border information may enhance trading strategies trying to exploit the momentum effect in Europe and Japan. Keywords: industry effects; international investing; momentum strategies; portfolio management
Introduction The driving force behind the well-established medium-term momentum effect has been the subject of much debate among academics and investment professionals.2 While one strand of literature aims at the development of theoretical models to explain the existence of this return continuation, another tries to refine the stylised facts about this phenomenon. The new data descriptions may provide evidence about the strengths and weaknesses of the theoretical models, or may help to construct new theories. Evidently, predictions about the persistence of the momentum effect are
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Journal of Asset Management
the driving force behind the research activity on this topic. The majority of the empirical research is conducted for the US market using the Centre for Research in Security Prices (CRSP) data tapes. One line of research has focused of the influence of industry effects on momentum. Moskowitz and Grinblatt (1999) argue that return continuation on the individual stock level is primarily driven by return continuation in industry effects. This type of information is important for finding the driving factors behind the momentum effect. According to their findings, the investor’s willingness to be exposed to industry risks is a key
Vol. 3, 2, 124–141
Henry Stewart Publications 1470-8272 (2002)
International industry momentum
determinant for the decision whether to invest in a momentum strategy. They indicate that a momentum strategy in whi
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