Frog in the Pan and the market-state effect on momentum

Valentina Galvani

Finance Research Letters, 2024, vol. 63, issue C

Abstract: Momentum profitability depends on the market state, with protracted market gains (UP state) heralding momentum profits and prolonged market declines (DOWN state) ushering momentum losses. Previous literature documents a monotonic negative relationship between information discreteness and momentum, consistent with the Frog in the Pan (FIP) hypothesis. This study shows that the relationship is exclusive to UP markets. Outlier-based aggregate discreteness measures indicate that information reaches investors with higher discreteness in DOWN than UP markets, consistent with the absence of momentum profitability in DOWN markets according to the FIP hypothesis.

Keywords: Equity momentum; Information discreteness; Market-state; Investor attention (search for similar items in EconPapers)
JEL-codes: G01 G10 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:63:y:2024:i:c:s1544612324004045

DOI: 10.1016/j.frl.2024.105374

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