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Opposites Attract: Combining Alpha Momentum and Alpha Reversal in International Equity Markets

Adam Zaremba, Mehmet Umutlu and Andreas Karathanasopoulos
The Journal of Investing April 2020, 29 (3) 38-62; DOI: https://doi.org/10.3905/joi.2020.1.120
Adam Zaremba
is associate professor of finance at the University of Dubai (UAE) and Poznań University of Economics and Business in Poznan, Poland; .
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Mehmet Umutlu
is associate professor of finance at Yasar University in Izmir, Turkey
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Andreas Karathanasopoulos
is professor of finance at the University of Dubai in the UAE This article is part of Project No. 2014/15/D/HS4/01235 of the National Science Centre of Poland.
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Abstract

The authors offer a new integrated framework to combine alpha momentum and alpha reversal into a superior investment strategy for international equity markets. Mixing both effects into a single blended alpha signal forms a stronger country and industry selection method. An equal-weighted strategy that simultaneously goes long the indexes with the highest short-term and the lowest long-term alphas and shorts the ones with the lowest short-term and highest long-term alphas yields monthly three-factor model alphas of 1.16% and 1.44% for countries and industries, respectively. The results are robust to alternative weighting schemes, the effect of trading costs, alternative alpha models, and controlling for popular return predictive variables.

TOPICS: Statistical methods, factor-based models

Key Findings

  • • The article offers a new integrated framework to combine alpha momentum and alpha reversal into a superior investment strategy for international stock markets.

  • • Mixing both effects into a single blended alpha signal forms a stronger country and industry selection method.

  • • The abnormal returns are economically significant and robust to alternative weighting schemes, different alpha models, and controlling for popular return predictive variables.

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The Journal of Investing: 29 (3)
The Journal of Investing
Vol. 29, Issue 3
April 2020
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Opposites Attract: Combining Alpha Momentum and Alpha Reversal in International Equity Markets
Adam Zaremba, Mehmet Umutlu, Andreas Karathanasopoulos
The Journal of Investing Mar 2020, 29 (3) 38-62; DOI: 10.3905/joi.2020.1.120

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Opposites Attract: Combining Alpha Momentum and Alpha Reversal in International Equity Markets
Adam Zaremba, Mehmet Umutlu, Andreas Karathanasopoulos
The Journal of Investing Mar 2020, 29 (3) 38-62; DOI: 10.3905/joi.2020.1.120
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  • Article
    • Abstract
    • DATA AND VARIABLES
    • THE BLENDED ALPHA AND OTHER RETURN-PREDICTIVE SIGNALS
    • COUNTRY AND INDUSTRY PORTFOLIOS BASED ON PAST ALPHAS
    • CONCLUDING REMARKS
    • ADDITIONAL READING
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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