International industry momentum

Abstract

There is ample empirical evidence that the existence of return continuation at the individual stock level for the six-month horizon is not confined to US stock markets. Recently, papers have investigated the existence of this momentum effect on US industry indices. This paper examines the profitability of momentum strategies for the US, Europe and Japan using the Datastream industry classification. These findings provide further evidence in favour of the existence of industry momentum for the US and Europe. For the Japanese stock market, there is little support for the industry momentum effect, which is not surprising, since other studies claim that there is no return continuation when Japanese stocks are investigated individually. In addition, the lead-lag relation between these three regions is examined. In particular, our results confirm the leading position of the US relative to Europe on the one-year horizon, while Europe leads Japan on this horizon. Using this cross-border information may enhance trading strategies trying to exploit the momentum effect in Europe and Japan.