Do Countries or Industries Explain Momentum in Europe?

Nijman, Theo; Verbeek, Marno; Swinkels, Laurens

doi:10.2139/ssrn.301533

Cited by 30 publications

(31 citation statements)

References 7 publications

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“…For average values, we find 0.93 percent for the country-neutral strategy versus 1.17 percent for the unrestricted strategies-that is, 79 percent of the profitability. This suggests that, though some of the momentum can be attributed to the country factor, the phenomenon appears to be mainly due to stock type, consistent with earlier empirical evidence (Nijman et al 2004;Richards 1997;Rouwenhorst 1998).…”

Section: The Role Of the Countrysupporting

confidence: 88%

“…Chan et al (2000) and Fong et al (2005) find a momentum effect at the country-index level, but Richards (1997) asserts that there is no medium-term country momentum effect, and Nijman et al (2004) conclude that momentum effects in European stock markets are primarily driven by individual stock effects, Downloaded by [Nanyang Technological University] at 18:14 20 August 2015 with industry and country momentum playing less important roles. That emerging economies are characteristically more idiosyncratic may help to explain why the country factor might be more prominent in explaining stock behavior patterns.…”

Section: The Role Of the Countrymentioning

confidence: 99%

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The Momentum Effect in Latin American Emerging Markets

Muga

Santamaria

2007

Emerging Markets Finance and Trade

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We find that momentum strategies yield profits in Latin American emerging markets. Both stock type and country play a major role in explaining the momentum effect in these markets, but stock type is much more important. For risk-averse investors, winner portfolios stochastically dominate loser portfolios in these markets, implying that there are no asset-pricing models consistent with risk-averse investors that can rationalize the momentum effect. The results obtained via the bootstrap procedure without replacement also uphold this conclusion.The momentum effect can be described basically as short-to medium-term persistence in stock returns; that is, winners and losers maintain the same return patterns for periods of approximately three to twelve months (Jegadeesh and Titman 1993). Though the bulk of the empirical evidence has been found for the U.S. market, 1 studies document the effect in other stock markets as well. Rouwenhorst (1998) finds evidence of the momentum effect in twelve European countries, Hon and Tonks (the country level. Fong et al. (2005) and Shen et al. (2005) present evidence of the momentum effect using international market indexes for both developed and emerging markets. Among a number of articles that analyze the momentum effect in emerging markets, Rouwenhorst (1999), Van der Hart et al. (2003), andGriffin et al. (2003) are all worth special mention. The overriding conclusion from all of the research is that momentum exists in emerging markets, but it is less intense than it is in more developed countries. However, the data used in the above-mentioned studies are not very recent; the last three studies cover periods from the 1980s to 1997, 1999, and 2000, respectively. Despite a number of different theories, the momentum effect, unlike other market anomalies, has never been explained to the unanimous satisfaction of researchers. Some authors suggest that the momentum effect is due to cross-sectional variations in stocks (see Conrad and Kaul 1998). Others claim that medium-term continuations are related to macroeconomic risk factors (Avramov and Chordia 2006; Chordia and Shivakumar 2002), and some attempt to relate the momentum effect to downside risk (Ang et al. 2001). Studies also link the effect to seasonal factors (Grinblatt and Moskowitz 2004; Hvidkjaer 2006) or to the importance of the transaction costs incurred in implementing momentum strategies (Lesmond et al. 2004) instead of implementing strategies of this type (Lesmond et al. 2004).Against such a background, attention must also be paid to explanations emerging from the study of investor behavior. Some authors who subscribe to the theory widely known as behavioral finance suggest that, by responding "irrationally" to various types of news, investors may provoke an underreaction, which would produce the momentum effect. Others have linked it to long-run overreaction (De Bondt and Thaler 1985), the theory being that the correction of delayed overreaction explains the long-term reversal, an overall perspective that captures both e...

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Section: The Role Of the Countrysupporting

confidence: 88%

Section: The Role Of the Countrymentioning

confidence: 99%

The Momentum Effect in Latin American Emerging Markets

Muga

Santamaria

2007

Emerging Markets Finance and Trade

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“…Two different methodologies are employed. The first one is a portfolio‐based regression approach developed in Nijman, Swinkels, and Verbeek (2002). The second one uses the Fama and MacBeth (1973) methodology on individual stock returns.…”

Section: Default Risk and Variation In Equity Returnsmentioning

confidence: 99%

Default Risk in Equity Returns

Vassalou

Xing

2004

The Journal of Finance

1,594

1,025

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This is the first study that uses Merton's (1974) option pricing model to compute default measures for individual firms and assess the effect of default risk on equity returns. The size effect is a default effect, and this is also largely true for the bookto-market (BM) effect. Both exist only in segments of the market with high default risk. Default risk is systematic risk. The Fama-French (FF) factors SMB and HML contain some default-related information, but this is not the main reason that the FF model can explain the cross section of equity returns.A FIRM DEFAULTS WHEN IT FAILS to service its debt obligations. Therefore, default risk induces lenders to require from borrowers a spread over the risk-free rate of interest. This spread is an increasing function of the probability of default of the individual firm.Although considerable research effort has been put toward modeling default risk for the purpose of valuing corporate debt and derivative products written on it, little attention has been paid to the effects of default risk on equity returns. 1 The effect that default risk may have on equity returns is not obvious, since equity holders are the residual claimants on a firm's cash f lows and there is no promised nominal return in equities.Previous studies that examine the effect of default risk on equities focus on the ability of the default spread to explain or predict returns. The default spread is usually defined as the yield or return differential between long-term BAA corporate bonds and long-term AAA or U.S. Treasury bonds.2 However, * Vassalou is at Columbia University and Xing is at Rice University. ton (1995, 1997), Jarrow and Turnbull (1995), Longstaff and Schwartz (1995), Zhou (1997), Lando (1998), andDuffee (1999), among others.2 For instance, many studies have shown that the yield spread between BAA and AAA corporate bond spread can predict expected returns in stocks and bonds. Such studies include those of Fama and Schwert (1977), Keim and Stambaugh (1986), Campbell (1987), and Fama and French (1989, 832The Journal of Finance as Elton et al. (2001) show, much of the information in the default spread is unrelated to default risk. In fact, as much as 85 percent of the spread can be explained as reward for bearing systematic risk, unrelated to default. Furthermore, differential taxes seem to have a more important inf luence on spreads than expected loss from default. These results lead us to conclude that, independent of whether the default spread can explain, predict, or otherwise relate to equity returns, such a relation cannot be attributed to the effects that default risk may have on equities. In other words, we still know very little about how default risk affects equity returns.The purpose of this paper is to address precisely this question. Instead of relying on information about default obtained from the bonds market, we estimate default likelihood indicators (DLI) for individual firms using equity data. These DLI are nonlinear functions of the default probabilities of the in...

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“…Serra (2000) document that cross-market diversification seems better than cross-industry diversification, for emerging markets, returns are driven by country factors and not by the industrial composition of indices. Nijman, Swinkels and Verbeek (2004) suggest that positive expected excess returns are primarily driven by individual stock effects, while industry momentum plays a less important role and country momentum is even weaker. Du and Denning (2005) find that industry momentum is mainly due to common factors and not industry-specific risk.…”

Section: Introductionmentioning

confidence: 99%

Prior Return Patterns in Sector Returns: Evidence for Emerging Markets

Sehgal

Jain

2012

AJFA

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In this paper, we examine if there are any prior return patterns for sector returns for BRICKS markets from January 1993 to February 2008. For short-term portfolio formation windows (up to 12 months), India and S.Africa report momentum behavior while South Korea reports reversals. For long-term formation windows (up to 60 months), Brazil exhibits momentum patterns which disappear for 60-12-12 strategies. India and Russia momentum patterns continue even for long-term portfolio formation windows South Korea, South Africa and China show weak reversals for long-term portfolio formation windows. We construct a sector factor based on Liu and Zhang (2008) argument that winner sector exhibit higher risk owing to stronger growth potential. We observe that a large part of prior return patterns in stock returns are absorbed by similar patterns in sector returns. Our findings shall be useful for portfolio managers and academicians with better insights about prior return patterns in sector data. The study contributes to the asset pricing and behavioral finance literature for emerging markets.

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Do Countries or Industries Explain Momentum in Europe?

Cited by 30 publications

References 7 publications

The Momentum Effect in Latin American Emerging Markets

The Momentum Effect in Latin American Emerging Markets

Default Risk in Equity Returns

Prior Return Patterns in Sector Returns: Evidence for Emerging Markets

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