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Cross-Sectional and Time-Series Momentum Returns and Market States Explained

Last Updated on 10 February, 2024 by Rejaul Karim

The study “Cross-Sectional and Time-Series Momentum Returns and Market States” by Muhammad A. Cheema, Gilbert Nartea, and Yimei Man examines the performance of time-series (TS) and cross-sectional (CS) momentum strategies in various market states.

Recent findings suggest that the TS strategy outperforms the CS strategy; however, this research provides new evidence that such outperformance occurs only when the market remains in the same state, either UP or DOWN. The paper further reveals that the TS approach underperforms relative to the CS strategy when the market transitions to a different state.

Moreover, the researchers highlight that the differences in momentum returns between the TS and CS strategies can be attributed to both the net long and net short positions of the TS strategy, thus offering fresh insights into the interplay between momentum returns and market states.

Original paper – Download PDF

Here you can download the PDF and original paper of Cross-Sectional and Time-Series Momentum Returns and Market States.

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Author

Muhammad A. Cheema
University of Otago New Zealand

Gilbert Nartea
University of Canterbury – College of Business and Law

Yimei Man
University of Waikato, Management School

Conclusion

In conclusion, the research paper “Cross-Sectional and Time-Series Momentum Returns and Market States” by Muhammad A. Cheema, Gilbert Nartea, and Yimei Man challenges the conventional wisdom that time-series (TS) momentum strategies consistently outperform cross-sectional (CS) strategies.

Providing new evidence, the authors reveal that the TS strategy’s superiority holds true only when market conditions remain in the same state, either UP or DOWN. Conversely, the study demonstrates that the TS approach underperforms the CS strategy when a market transitions to a different state.

Furthermore, the analysis underscores that these differences in momentum returns between the TS and CS strategies are linked to both the net long and net short positions of the TS strategy. These findings introduce valuable insights into the relationship between momentum strategies and market states, with crucial implications for investors pursuing return-enhancing strategies.

Related Reading:

Absolute Strength: Exploring Momentum in Stock Returns

Industry Momentum: The Role of Time-Varying Factor Exposures and Market Conditions

FAQ

Q1: What is the main focus of the research paper by Muhammad A. Cheema, Gilbert Nartea, and Yimei Man?

The research paper examines the performance of time-series (TS) and cross-sectional (CS) momentum strategies in different market states. It challenges the conventional wisdom that TS momentum consistently outperforms CS momentum and provides new evidence regarding the conditions under which each strategy excels.

Q2: What is the key finding regarding the outperformance of time-series momentum?

Contrary to recent findings suggesting the outperformance of time-series momentum, this research reveals that TS momentum’s superiority occurs only when the market remains in the same state, either UP or DOWN. The study highlights that TS momentum underperforms relative to CS momentum when the market transitions to a different state.

Q3: What factors contribute to the differences in momentum returns between time-series and cross-sectional strategies?

The analysis indicates that the differences in momentum returns between TS and CS strategies are linked to both the net long and net short positions of the TS strategy. This suggests that the performance variation is associated with the overall positioning of the TS strategy in different market states, providing nuanced insights into the interplay between momentum strategies and market conditions.

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