Macromomentum: Evidence of Predictability in International Equity Markets

Abstract

This study examines momentum and reversals in portfolios of international stock indices. The results indicate strong momentum up to a year following the portfolio formation date and significant reversals in the subsequent two years. While momentum is driven mostly by predictability within equity markets, reversals are at least partly due to a continuing decline in stock prices in response to past currency appreciation. These patterns seem to be related to misreaction to news about macroeconomic conditions, not corporate earnings. Overall, our results demonstrate the pervasiveness of momentum and reversals and provide support for behavioral theories.

Keywords: Macromomentum, international equity markets, predictability