Is Japan Different? Evidence on Momentum and Market Dynamics

Abstract

Recent evidence for the US indicates that momentum profits are conditional on market dynamics. This paper documents that the following finding holds for the Japanese market as well: momentum returns are significantly higher when the market stays in the same condition than when it transitions to the other state. This evidence is consistent with the behavioral model of Daniel et al. (1998, Journal of Finance 53(6), 1839–1885.). Furthermore, market transitions occurred more frequently in Japan compared to the US. These results explain why average momentum returns have historically been low in Japan, a fact generally referred to as an empirical failure of momentum. Overall, my findings indicate that different market dynamics, and not different momentum, cause the overall low momentum returns in Japan.

Cross-sectional and time-series momentum returns and market dynamics: evidence from Japan

“…Our results show that CS momentum returns in Japan are large and significant in market continuations but turn negative during market transitions affirming the results reported earlier in Hanauer (2014). More importantly, we show that the same relation between momentum returns and market states also holds for TS momentum returns.…”

“…Finally, every stock must have at least 30 valid monthly observations. (Fama and French, 2012, Gong, Liu and Liu, 2015, Griffin, Ji and Martin, 2003, Naranjo and Porter, 2007, Chui, Wei and Titman, 2000, Chui et al, 2010, Asness, 2011, Hanauer, 2014. The alphas of CAPM and Fama-French bear the same conclusion.…”

“…We report a negative risk premium with the risk-free rate exceeding the returns of both the market and the Nikkei225 with a mean of 0.244% and a maximum of 0.68% and a minimum of zero. Finally, the small-minus-big size factor (SMB) average almost zero at -0.028% with a maximum of 2 Please refer to a list of generic filter rules to exclude non-common equity securities summarized in Table A1 of Hanauer (2014). 12.99% and a minimum of -11.15% while the high-minus-low book to market factor (HML) has a mean of 0.419% with a maximum of 10.08% and a minimum of -13.82%.…”

“…However more recently, employing several screens on his dataset, Hanauer (2014) documents momentum returns in Japan when the market continues in the same direction, UP or DN, consistent with the results of Asem and Tian (2010) for the U.S. markets. 1 Both studies by Hanauer (2014) and Asem and Tian (2010) employ CS momentum. In this study, we also examine the relation between momentum returns and market states in Japan using the TS strategy.…”

Australian momentum: performance, capacity and the GFC effect

“…There is a large body of evidence that shows momentum has time‐varying characteristics (Hon and Tonks, ; Antoniou et al ., ; Du and Watkins, ; Galariotis, ; Naranjo and Porter, ; Blitz et al ., ; Chao et al ., ), and is present to varying extents in different economic conditions (expansion, recession) of the market (Huang, ), and to different styles (Chan and Docherty, ). There is evidence that momentum returns are significantly higher when the market stays for prolonged periods of time in the same condition than when it transitions between states (Hanauer, ). There is also evidence that momentum is present to different degrees in different strata of the market (Hong et al ., ; Nguyen, ; Galariotis, ).…”