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On the time-varying dynamics of stock and commodity momentum returns

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  • Stadtmüller, Immo
  • Auer, Benjamin R.
  • Schuhmacher, Frank

Abstract

Using a state-of-the-art Markov switching framework augmented by popular proxies of arbitrage activity and investor sentiment, we reexamine the dynamics of stock momentum returns and provide a first structured time-series analysis of commodity momentum portfolios. Our study arrives at the important finding that, in contrast to previous studies relying on restrictive static models, we cannot detect persuasive links between momentum returns and such variables in recent data. Consequently, the evolution of momentum returns remains puzzling. Furthermore, putting the behavior of extremes aside, stock and commodity momentum returns exhibit quite similar regime-switching behavior. This supports the frequent statement that the financialization of commodity futures markets has non-trivially linked stock and commodity returns.

Suggested Citation

  • Stadtmüller, Immo & Auer, Benjamin R. & Schuhmacher, Frank, 2022. "On the time-varying dynamics of stock and commodity momentum returns," Finance Research Letters, Elsevier, vol. 46(PB).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pb:s154461232100386x
    DOI: 10.1016/j.frl.2021.102385
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    More about this item

    Keywords

    Momentum investing; Regime-switching; Limits to arbitrage; Investor sentiment;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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