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

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.