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Momentum and Mean Reversion Across National Equity Markets

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Author Info
Ronald J. Balvers (Department of Economics, West Virginia University)
Yangru Wu (Department of Finance and Economics, Rutgers University)

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Abstract

A number of studies have separately identified mean reversion and momentum, but this paper considers these effects jointly: Potential for mean reversion and momentum is combined optimally into one indicator, interpretable as a risk-adjusted expected return. Combination momentum-contrarian strategies, used to select from among 18 developed equity markets at a monthly frequency, outperform both pure momentum and pure contrarian strategies. A key assumption is that, among developed markets, only global equity price index shocks can have permanent components, as would be reasonable in a production-based asset-pricing context, given that production levels converge across developed countries. The results hold with basic risk corrections and continue to hold after transactions costs are included. They reveal that it is important to control for mean reversion in exploiting momentum and vice versa.

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File URL: http://www.be.wvu.edu/div/econ//work/pdf_files/04-11.pdf
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File Function: First version, September 20, 2004
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Publisher Info
Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 04-11.

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Length: 34 pages
Date of creation: 2004
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Handle: RePEc:wvu:wpaper:04-11

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Related research
Keywords: Mean Reversion Momentum International Asset Pricing Investment Strategies

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Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ronald J. Balvers & Douglas W. Mitchell, 2001. "Reducing the Dimensionality of Linear Quadratic Control Problems," Tinbergen Institute Discussion Papers 01-043/2, Tinbergen Institute. [Downloadable!]
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