The Relation between Earnings and Price Momentum: Does it Vary Across Regimes?

Abstract

This paper investigates the time varying relationship between earnings momentum and price momentum. Using a Markov-switching framework that allows for variations between high volatility and low volatility states, we find that price momentum is significantly more influenced by earnings momentum in the high volatility state. Further for price momentum we find that loser firms display a higher degree of differential response to earnings momentum across the low and high volatility, relative to winner firms. Limited financing and investor’s sensitivity to future investment opportunities might explain these two results.

Keywords: momentum, regime-switching

JEL Classification: G12, E32