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

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

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.

Suggested Citation

  • Bohl, Martin T. & Czaja, Marc-Gregor & Kaufmann, Philipp, 2016. "Momentum profits, market cycles, and rebounds: Evidence from Germany," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 139-159.
    • Handle: RePEc:eee:quaeco:v:61:y:2016:i:c:p:139-159
    DOI: 10.1016/j.qref.2016.01.003
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    2. Hofmann, Daniel & Keiber, Karl Ludwig & Luczak, Adalbert, 2022. "Up and down together? On the linkage of momentum and reversal," Global Finance Journal, Elsevier, vol. 54(C).
    3. Mehdi Zolfaghari & Bahram Sahabi, 2021. "The impact of oil price and exchange rate on momentum strategy profits in stock market: evidence from oil-rich developing countries," Review of Managerial Science, Springer, vol. 15(7), pages 1981-2023, October.
    4. Josef Fink, 2020. "A Review of the Post-Earnings-Announcement Drift," Working Paper Series, Social and Economic Sciences 2020-04, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    5. Fink, Josef, 2021. "A review of the Post-Earnings-Announcement Drift," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    6. Chen, Jiun-Lin (Alex) & Hwang, Hyoseok (David), 2019. "Business cycle, expected return and momentum payoffs," Finance Research Letters, Elsevier, vol. 29(C), pages 83-89.
    7. Martin H. Schmidt, 2017. "Trading strategies based on past returns: evidence from Germany," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(2), pages 201-256, May.
    8. Wouassom, Alain & Muradoğlu, Yaz Gülnur & Tsitsianis, Nicholas, 2022. "Global momentum: The optimal trading approach," Journal of Behavioral and Experimental Finance, Elsevier, vol. 36(C).

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    More about this item

    Keywords

    Price and earnings momentum; Bull and bear markets; Market rebounds; Momentum crashes; Time-varying performance measurement;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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