Macroeconomic momentum and cross-sectional equity market indices

Yu Zhang, Konstantina Kappou and Andrew Urquhart

Journal of International Financial Markets, Institutions and Money, 2024, vol. 92, issue C

Abstract: Momentum is a well-known and studied artefact of financial markets. In this paper, we investigate whether momentum in a country’s macroeconomic variables is related to the future performance of equities in that country. We find that the past economic trends of a country’s fundamentals are positively associated with the equity market index returns. Based on that, an economic momentum portfolio of buying (selling) equity index in countries with relatively strong (weak) economic past trends exhibits an annualised Sharpe ratio of 0.87. The economic momentum portfolio outperforms benchmarks regarding rewards to variability and maximum drawdown and yields an annualised alpha of 3.72%, leaving 95% of the returns unexplained by the benchmarks.

Keywords: Momentum; Macroeconomics; Cross-Sectional; Equity indices (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:92:y:2024:i:c:s1042443124000404

DOI: 10.1016/j.intfin.2024.101974

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