Market States and Momentum
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 percent, whereas the mean profit
following negative market returns is negative 0.37 percent. 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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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 percent, whereas the mean profit
following negative market returns is negative 0.37 percent. 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.
[download pdf]