Cross‐Sectional and Time Series Momentum Returns and Market States

Abstract

Recent evidence on momentum returns shows that the time-series (TS) strategy outperforms the cross-sectional (CS) strategy. We present new evidence that this happens only when the market continues in the same state, UP or DOWN. In fact, we find that the TS strategy underperforms the CS strategy when the market transitions to a different state. Our results also show that the difference in momentum returns between TS and CS strategies is related to both the net long and net short positions of the TS strategy.

Cross-sectional and time-series momentum returns: are Islamic stocks different?

“…We further find that CS and TS momentum returns of both Islamic and Non-Islamic stocks are large and significant when the market continues in the same direction than when it transitions to a different state. Additionally, our results show that the TS strategy outperforms (underperforms) the CS strategy in market continuations (transitions) which is consistent with the recent evidence of Cheema, Nartea, and Man (2017) who find that the TS strategy outperforms (underperforms) the CS strategy in the U.S. because of the positive (negative) autocorrelations between net long/short position and subsequent market returns in market continuations (transitions). However, we do not find any relation between momentum returns and both IU and IV.…”

“…For example, we find that the TS strategy takes a net long position for 156 out of 203 months following UP, and net short position for 67 out of 85 months following DOWN markets, which results in comparatively higher (lower) returns for the TS strategy because of positive (negative) autocorrelation between the active position and subsequent market returns in market continuations (transitions). Our results are consistent withCheema, Nartea, and Man (2017) for the U.S. market.…”

Cross-Sectional and Time-Series Momentum Returns and Market Dynamics: Are Islamic Stocks Different?

“…Second, we find that for both Islamic and Non-Islamic stocks, the TS strategy outperforms (underperforms) the CS strategy in market continuations (transitions) because the TS strategy takes a net long (short) position following UP (DN) markets, consistent with the findings of Cheema, Nartea, and Man (2017) for the U.S. market. Third we find that the positive relation between IU and momentum returns as well as the positive relation between IV and momentum returns found in the U.S. stock markets is absent in both Islamic and Non-Islamic stocks in the Malaysian stock market.…”

Can market state and market volatility explain time-varying momentum profits in South Africa?

“…The authors further find that idiosyncratic volatility has no relationship with momentum returns – a result explored in detail later. Finally, Cheema et al. (2018) find similar results (in the US market) in employing a time-series momentum strategy, where the strategy provides positive returns when markets continue in the same state.…”