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

Last Updated on 10 February, 2024 by Rejaul Karim

The study “Industry Momentum: The Role of Time-Varying Factor Exposures and Market Conditions” by Hannah Hühn delves into momentum strategies based on recent and intermediate past returns of U.S. industry portfolios. This empirical analysis reveals that strategies centered around intermediate past returns generally yield higher mean returns than those focused on recent past returns.

The research also demonstrates that these strategies display time-varying factor exposures, particularly when utilizing the Fama and French (2015) five-factor model. Upon risk-adjusting for these dynamic exposures, the profitability of industry momentum strategies declines, becoming insignificant in the case of strategies based on recent past returns.

Nonetheless, the majority of strategies rooted in intermediate past returns continue to generate substantial profits. Additionally, the study investigates momentum crashes and their connection to specific market conditions, highlighting the relationship between industry momentum strategies, market states, and the business cycle, with no discernible link to market volatility or sentiment.

Abstract Of Paper

This paper focuses on momentum strategies based on recent and intermediate past returns of U.S. industry portfolios. Our empirical analysis shows that strategies based on intermediate past returns yield higher mean returns. Moreover, strategies involving both return specifications exhibit time-varying factor exposures, especially when applying the Fama and French (2015) five-factor model. After risk-adjusting for these dynamic exposures, the profitability of industry momentum strategies diminishes and becomes insignificant for strategies based on recent past returns. However, most strategies built on intermediate past returns remain profitable and highly significant. Further analyses reveal that industry momentum strategies are disrupted by periods of strong negative risk-adjusted returns. These so-called momentum crashes seem to be driven by specific market conditions. We find profits of industry momentum strategies to be related to market states and to the business cycle. However, there is no clear evidence that industry momentum can be linked to market volatility or sentiment.

Original paper – Download PDF

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Author

Hannah Hühn
University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg

Conclusion

In conclusion, Hannah Hühn’s research paper “Industry Momentum: The Role of Time-Varying Factor Exposures and Market Conditions” provides a comprehensive analysis of momentum strategies based on recent and intermediate past returns of U.S. industry portfolios.

The study establishes that strategies focused on intermediate past returns produce higher mean returns and retain profitability after risk-adjusting for dynamic factor exposures, while recent past return strategies become insignificant. Moreover, the research explores the effects of momentum crashes and their correlation with specific market conditions, highlighting the role of market states and the business cycle in the profits of industry momentum strategies.

However, no conclusive connection between industry momentum, market volatility, and sentiment is identified. These findings offer a valuable contribution to the understanding of industry momentum and market conditions, providing significant insights for investors seeking more effective strategic approaches.

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FAQ

Q1: What is the main focus of the research paper by Hannah Hühn?

The research paper investigates momentum strategies based on recent and intermediate past returns of U.S. industry portfolios. The primary focus is on understanding the profitability and dynamics of these industry momentum strategies and their connection to time-varying factor exposures and market conditions.

Q2: What are the key findings regarding the profitability of industry momentum strategies?

The empirical analysis reveals that strategies based on intermediate past returns generate higher mean returns compared to those focused on recent past returns. After adjusting for time-varying factor exposures using the Fama and French five-factor model, the profitability of industry momentum strategies declines, becoming insignificant for recent past return strategies. However, most strategies rooted in intermediate past returns remain profitable and highly significant.

Q3: What insights does the research provide about momentum crashes and market conditions?

The study explores momentum crashes, periods of strong negative risk-adjusted returns in industry momentum strategies, and their correlation with specific market conditions. The findings indicate a connection between the profitability of industry momentum strategies and market states, as well as the business cycle. However, there is no clear evidence linking industry momentum to market volatility or sentiment.

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