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Do countries or industries explain momentum in Europe?

  • Nijman, Theo
  • Swinkels, Laurens
  • Verbeek, Marno

The driving force behind the well-documented medium term momentum effect in stock returns is subject of much debate. Empirical papers that aim to find the determinants of this return continuation, seem to be almost exclusively restricted to US stock markets. Consequently, regional effects have received little attention in these analyses. This paper contributes to the discussion by investigating the presence of country and industry momentum in Europe and addressing the question whether individual stock momentum is subsumed by country or industry momentum.We examine these issues by introducing a portfolio-based regression approach, which allows to test hypotheses about the existence and relative importance of multiple effects using standard statistical techniques. While the traditional sorting techniques are not suited to disentangle a multitude of possibly interrelated effects (e.g. momentum, value, and size), our method can be used even when only a moderate number of stocks are available. Our results suggest that the positive expected excess returns of momentum strategies in European stock markets are primarily driven by individual stocks effects, while industry momentum plays a less important role and country momentum is even weaker. These results are robust to the inclusion of value and size effects.

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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 11 (2004)
Issue (Month): 4 (September)
Pages: 461-481

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Handle: RePEc:eee:empfin:v:11:y:2004:i:4:p:461-481
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  1. Harrison Hong & Jeremy C. Stein, 1997. "A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets," NBER Working Papers 6324, National Bureau of Economic Research, Inc.
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