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International price and earnings momentum


Leippold, Markus; Lohre, Harald (2012). International price and earnings momentum. European Journal of Finance, 18(6):535-573.

Abstract

We find that price and earnings momentum are pervasive features of international equity markets even when controlling for data snooping biases. For European countries, we find that price momentum is subsumed by earnings momentum on an aggregate level. However, this rationale does not apply to each and every country. While the above explanation is confined to certain time periods in the U.S., earnings momentum nevertheless appears to be a crucial driver of the price momentum anomaly in many markets. Since we cannot establish a decent relation between momentum and macroeconomic risks, we suspect a behavioral-based explanation to be at work. In fact, we find momentum profits to be more pronounced for portfolios characterized by higher information uncertainty. Hence, the momentum anomaly may well be rationalized in a model of investors underreacting to fundamental news. Finally, we find that momentum works better when limited to stocks with high idiosyncratic risk or higher illiquidity, suggesting that limits to arbitrage deter rational investors from exploiting the anomaly.

Abstract

We find that price and earnings momentum are pervasive features of international equity markets even when controlling for data snooping biases. For European countries, we find that price momentum is subsumed by earnings momentum on an aggregate level. However, this rationale does not apply to each and every country. While the above explanation is confined to certain time periods in the U.S., earnings momentum nevertheless appears to be a crucial driver of the price momentum anomaly in many markets. Since we cannot establish a decent relation between momentum and macroeconomic risks, we suspect a behavioral-based explanation to be at work. In fact, we find momentum profits to be more pronounced for portfolios characterized by higher information uncertainty. Hence, the momentum anomaly may well be rationalized in a model of investors underreacting to fundamental news. Finally, we find that momentum works better when limited to stocks with high idiosyncratic risk or higher illiquidity, suggesting that limits to arbitrage deter rational investors from exploiting the anomaly.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2012
Deposited On:07 Feb 2012 08:25
Last Modified:07 Dec 2017 11:26
Publisher:Routledge
ISSN:1351-847X (P) 1466-4364 (E)
Additional Information:This is an electronic version of an article published in Leippold, Markus; Lohre, Harald (2011). International price and earnings momentum. European Journal of Finance:Epub ahead of print. European Journal of Finance is available online at: www.tandfonline.com
Publisher DOI:https://doi.org/10.1080/1351847X.2011.628683
Other Identification Number:merlin-id:4431

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