Momentum profits, market cycles, and rebounds: Evidence from Germany

Martin T. Bohl, Marc-Gregor Czaja and Philipp Kaufmann

The Quarterly Review of Economics and Finance, 2016, vol. 61, issue C, 139-159

Abstract: Recent evidence shows that U.S. price momentum strategies suffer tremendous losses in times of highly volatile market recoveries. We extend the existing literature by analyzing the performance of both price and earnings momentum portfolios across different market states. For our German sample, we find that the long–short price momentum strategy loses almost 9% per month during market rebounds. This so-called momentum crash is solely due to recovering loser stocks. After a prolonged bear market hits bottom, the loser portfolio is mostly composed of highly volatile and leveraged small-cap stocks, which have lost nearly 83% of their market value over the preceding year and are thus susceptible to heavy rebounds. Interestingly, the momentum crash phenomenon seems to disappear once we control for exposures to the Fama–French factors, with the market factor being the most relevant. By contrast, earnings momentum strategies are less affected by market rebounds and also consistently outperform price momentum strategies on a risk-adjusted basis.

Keywords: Price and earnings momentum; Bull and bear markets; Market rebounds; Momentum crashes; Time-varying performance measurement (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:61:y:2016:i:c:p:139-159

DOI: 10.1016/j.qref.2016.01.003

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