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Size, Value, and Momentum in Developed Country Equity Returns: Macroeconomic and Liquidity Exposures

Last Updated on 10 February, 2024 by Rejaul Karim

In the research paper titled “Size, Value, and Momentum in Developed Country Equity Returns: Macroeconomic and Liquidity Exposures,” Nusret Cakici and Sinan Tan investigate the value and momentum factors across 23 developed international stock markets.

The study reveals that value and momentum premia are typically smaller and more negatively correlated for large market capitalization stocks compared to small ones. The authors also explore three sets of risk exposures affecting value and momentum returns: macroeconomic risk, funding liquidity risk, and stock market liquidity risk.

Key findings include the diminished value returns prior to a recession and the limited sensitivity of momentum returns. Moreover, the study uncovers that value returns usually decline during periods of poor funding liquidity, whereas momentum returns remain mostly unaffected.

Overall, this comprehensive analysis deepens the understanding of international equity markets and sheds light on the complexities of value effect, momentum effect, and associated risks.

Abstract Of Paper

The paper investigates value and momentum factors in 23 developed international stock markets. We find that typically value and momentum premia are smaller and more negatively correlated for large market capitalization stocks relative to small. Momentum factors are more highly correlated internationally relative to value. We provide international evidence on three sets of risk exposures of value and momentum returns: macroeconomic risk, funding liquidity risk, and stock market liquidity risk. We find that value returns are typically lower prior to a recession while momentum returns often exhibit little sensitivity. Value returns are typically lower in times of poor funding liquidity, whereas, with notable exceptions, momentum returns are typically unaffected. Lastly, for almost all countries, value returns are high in poor stock market liquidity conditions. The same result appears to be true for momentum in Asia Pacific, North America, and largely in Europe.

Original paper – Download PDF

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Author

Nusret Cakici
Fordham university

Sinan Tan
Fordham University – Gabelli School of Business

Conclusion

In conclusion, the research paper “Size, Value, and Momentum in Developed Country Equity Returns: Macroeconomic and Liquidity Exposures” by Nusret Cakici and Sinan Tan offers a comprehensive analysis of value and momentum factors across 23 developed international stock markets.

The study highlights the differences between large and small market capitalization stocks and elucidates the correlation between momentum factors on an international scale. By examining the risk exposures of value and momentum returns in relation to macroeconomic risk, funding liquidity risk, and stock market liquidity risk, the authors shed light on the complex dynamics that govern these factors.

The findings provide valuable insights into the varied behaviors of value and momentum returns under different economic conditions and liquidity scenarios. These insights contribute to a deeper understanding of developed international equity markets and the intricate interplay between value and momentum factors, aiding investors and practitioners in better navigating these markets.

Related Reading:

Implementing Momentum: What Have We Learned?

Optimization of Equity Momentum: (How) Does it Work?

FAQ

Q1: What is the main focus of the research paper by Nusret Cakici and Sinan Tan?

The research paper investigates value and momentum factors across 23 developed international stock markets. It focuses on understanding the behavior of value and momentum premia, particularly examining their size, correlation, and risk exposures in the context of macroeconomic conditions and liquidity risks.

Q2: What are the key findings of the study?

The study reveals that value and momentum premia are generally smaller and more negatively correlated for large market capitalization stocks compared to small ones. Momentum factors exhibit higher correlation internationally relative to value factors. Additionally, the research explores risk exposures, highlighting that value returns are typically lower before a recession, and momentum returns show limited sensitivity to such periods. Value returns are also lower in times of poor funding liquidity, while momentum returns are generally unaffected. Moreover, value returns tend to be high in poor stock market liquidity conditions for almost all countries.

Q3: How does the paper contribute to the understanding of international equity markets?

The paper contributes to a deeper understanding of international equity markets by providing insights into the size and correlation of value and momentum factors across developed countries. Furthermore, it explores the impact of macroeconomic and liquidity risks on the returns of these factors, offering valuable information for investors and practitioners navigating international stock markets.

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