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Alpha Momentum and Alpha Reversal in Country and Industry Equity Indexes Explained

Last Updated on 10 February, 2024 by Rejaul Karim

The paper titled “Alpha Momentum and Alpha Reversal in Country and Industry Equity Indexes” by Adam Zaremba, Mehmet Umutlu, and Andreas Karathanasopoulos presents an enthralling exploration into the predictive power of past alphas on future country and industry returns. Spanning 62 pages, this research, last written in August 2018, delves into the unique return patterns in the cross-section of country and industry returns, drawing from an extensive examination of equity indexes across 51 stock markets from 1973 to 2018.

The compelling findings unveil the intriguing phenomena of past short-term alphas positively predicting future returns, while long-term alphas exhibit a negative predictive effect. These novel patterns offer tantalizing prospects for the development of effective international equity allocation strategies, yielding both economically and statistically significant raw and risk-adjusted returns.

Additionally, the robustness of these patterns in diverse scenarios, including alternative alpha models, trading costs, and market conditions, further underscores their significance in the realm of asset pricing and equity anomalies.

Abstract Of Paper

Do past alphas predict future country and industry returns? Examination of equity indexes from 51 stock markets between 1973 and 2018 allows us to demonstrate new return patterns in the cross-section of country and industry returns. Past short-term (long-term) alphas positively (negatively) predict future returns. These phenomena can be translated into effective international equity allocation strategies, producing economically and statistically significant raw and risk-adjusted returns. The profitability is robust to many considerations, including alternative alpha models, the effect of trading costs, different holding periods, or subsample and subperiod analyses. Also, the alpha momentum and reversal subsume their return-based counterparts. Finally, the alpha-based patterns are particularly pronounced following bull markets and across the markets characterized by high arbitrage constraints, supporting the behavioral explanation of the anomalies.

Original paper – Download PDF

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Author

Adam Zaremba
Montpellier Business School; Poznan University of Economics and Business

Mehmet Umutlu
Edinburgh Napier University, The Business School, Accounting and Finance Subject Group

Andreas Karathanasopoulos
University of Dubai

Conclusion

In conclusion, “Alpha Momentum and Alpha Reversal in Country and Industry Equity Indexes” presents a compelling testament to the predictive power of past alphas on future country and industry returns.

The research’s extensive examination of equity indexes from 51 stock markets between 1973 and 2018 has unearthed novel return patterns in the cross-section of country and industry returns, shedding light on the phenomena of past short-term alphas positively predicting future returns, juxtaposed with the negative predictive effect of long-term alphas. The implications of these phenomena for international equity allocation strategies are profound, yielding economically and statistically significant raw and risk-adjusted returns.

Moreover, the robustness of these patterns to a myriad of considerations and their pronounced manifestation following bull markets and in markets characterized by high arbitrage constraints underpin the behavioral explanation of these anomalies, cementing their enduring relevance in asset pricing and the cross-section of returns predictability.

Ultimately, this study offers captivating insights into the dynamics of international investment, underscored by the persuasive influence of alpha momentum and reversal on global equity markets.

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FAQ

What is the main focus of the paper “Alpha Momentum and Alpha Reversal in Country and Industry Equity Indexes” by Adam Zaremba, Mehmet Umutlu, and Andreas Karathanasopoulos?

The main focus of the paper is to explore the predictive power of past alphas on future country and industry returns. The research investigates return patterns in the cross-section of country and industry returns by examining equity indexes from 51 stock markets between 1973 and 2018.

What are the key findings of the paper regarding the predictive effect of past alphas?

The paper reveals novel return patterns, indicating that past short-term alphas positively predict future returns, while long-term alphas exhibit a negative predictive effect. These findings suggest that the historical performance of alphas can be used to develop effective international equity allocation strategies, yielding economically and statistically significant raw and risk-adjusted returns.

What is the significance of the predictive patterns for international equity allocation strategies?

The predictive patterns uncovered in the study have significant implications for the development of international equity allocation strategies. The observed predictive power of past alphas provides opportunities for investors to make informed decisions and achieve positive returns in global equity markets.

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