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Cross-Country Composite Momentum

Last Updated on 10 February, 2024 by Rejaul Karim

In the research paper “Cross-Country Composite Momentum” by Birgit Müller and Sebastian Müller, the authors examine the predictability of firm-specific momentum profits across various international equity markets, using an array of stock characteristics.

The study demonstrates that the predictor, which is relatively simple to compute, can produce significant positive out-of-sample long-short portfolio returns. The cross-country analysis reveals that both ordinary and composite-enhanced momentum returns tend to be higher in countries with lower trading frictions and markets marked by less information opaqueness.

Additionally, the research highlights that higher composite-enhanced momentum returns are observed in highly individualistic countries with smaller degrees of power distance.

The study’s findings provide empirical support for overreaction-based explanations of (composite-enhanced) momentum, contributing valuable knowledge on momentum profits, market efficiency, and international stock markets.

Abstract Of Paper

We demonstrate that firm-specific momentum profits are predictable across a wide range of international equity markets when combining information given in a multitude of stock characteristics. This predictor is comparatively simple to compute and can yield significant positive out-of-sample long-short portfolio returns. Cross-country analyses reveal that both, ordinary and composite-enhanced momentum returns tend to be higher within countries that exhibit less trading frictions and markets that exhibit less information opaqueness. Simultaneously, we find composite-enhanced momentum returns to be higher in highly individualistic countries that simultaneously exhibit smaller degrees of power distance. Overall, we interpret reported findings as empirical support for overreaction-based explanations of (composite-enhanced) momentum.

Original paper – Download PDF

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Author

Birgit Müller
Technical University of Darmstadt

Sebastian Müller
Technische Universität München (TUM) – TUM School of Management

Conclusion

In conclusion, the research paper “Cross-Country Composite Momentum” by Birgit Müller and Sebastian Müller offers valuable insights into the predictability of firm-specific momentum profits in international equity markets. By combining a multitude of stock characteristics, the authors establish a straightforward predictor capable of yielding significant positive out-of-sample long-short portfolio returns.

The cross-country analysis uncovers that both ordinary and composite-enhanced momentum returns tend to be higher in countries with lower trading frictions and markets characterized by less information opaqueness.

Notably, higher composite-enhanced momentum returns are associated with highly individualistic countries exhibiting smaller degrees of power distance. These findings support overreaction-based explanations of the (composite-enhanced) momentum phenomenon, contributing an enhanced understanding of momentum profits, market efficiency, and international stock markets.

Related Reading:

Unraveling Momentum’s Moments

Fact, Fiction and Momentum Investing

FAQ

Q1: What does the research paper “Cross-Country Composite Momentum” focus on, and what is the main predictor used in the study?

The research paper focuses on examining the predictability of firm-specific momentum profits in international equity markets. The main predictor used in the study is a relatively simple-to-compute composite of various stock characteristics, demonstrating its ability to generate significant positive out-of-sample long-short portfolio returns.

Q2: What are the key findings regarding momentum returns in international equity markets?

The study reveals that both ordinary and composite-enhanced momentum returns tend to be higher in countries with lower trading frictions and markets marked by less information opaqueness. Additionally, higher composite-enhanced momentum returns are observed in highly individualistic countries with smaller degrees of power distance.

Q3: How do the findings contribute to our understanding of momentum profits, market efficiency, and international stock markets?

The findings provide empirical support for overreaction-based explanations of (composite-enhanced) momentum. By demonstrating the predictability of momentum profits using a composite of stock characteristics, the research enhances our understanding of the factors influencing momentum returns. The study’s insights contribute to discussions on market efficiency and shed light on the dynamics of international stock markets in the context of momentum strategies.

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