An empirical study on evidence and sources of international momentum

Momentum investment strategy which buys past intermediate-term winner stocks and sells past intermediate-term loser stocks generates positive profits over three-month to one-year holding periods. This price anomaly has attracted a lot of attention since it is inconsistent with the traditional Market-Efficiency Hypothesis. This dissertation uses an extensive international data set first to detect the existence of international momentum effect, then to investigate the sources of momentum profits.; To examine the momentum effect in an international context, we implement momentum investment strategies with a sample of about 20,000 stocks from 18 developed countries during 1973-2001. We find that an internationally diversified momentum strategy earns significant positive profits over intermediate horizons. At the country level, most countries in our sample exhibit strong momentum while Asian countries display much weaker momentum effects. We also find that exchange rate movements contribute little to the profitability of international momentum strategies. The momentum returns decrease by about 4-5% across the board when reasonable transaction costs are considered, but they remain statistically and economically significant in most countries.; On the sources of momentum profits, we first examine whether the cross-sectional variation in momentum returns can be explained by some institutional and cultural differences across countries. We find that momentum returns are negatively related to quality of accounting information and positively related to individualism in each country after controlling for other country-level variables which could proxy for the efficiency of capital markets. Our findings suggest that momentum phenomenon is linked to information dissemination mechanism among investors, which is consistent with the prediction of existing behavioral theories. We also investigate the interaction between style momentum and price momentum. We find no strong evidence of international style momentum. Price momentum in each country has little changed after controlling for possible style effect. Our results indicate that investing style is not an independent source of momentum. Finally, we show that the profitability of momentum strategies does not depend on aggregate market conditions.