TY - JOUR
T1 - Asymmetric Momentum Contingency in Gain and Loss: <em>A Wavelet Approach</em>
JF - The Journal of Investing
SP - 76
LP - 88
DO - 10.3905/joi.2020.1.118
VL - 29
IS - 3
AU - Dong, Huijian
AU - Guo, Xiaomin
Y1 - 2020/03/31
UR - http://joi.pm-research.com/content/29/3/76.abstract
N2 - The authors explore the separate momentum effect in the positive and negative return environments at both the time domain and the frequency domain. Using the power spectrums and daily returns of sixteen representative exchange-traded funds (ETFs), the authors attempt to answer whether the momentum strategies have equal endurance gain and loss markets with assets that represent different market capitalizations, value, and industry. The authors’ results provide evidence that the US equity market carries strong negative-return resistance. The probability of realizing positive return is increasingly higher when the market carries longer consecutive negative returns. Small-cap stocks exhibit momentum effect in positive return environment but mean reversion effect in negative returns. For value stocks, the probabilities of continuing positive returns are 16.83% higher; for growth stocks, the probabilities of flipping over from negative returns are 16.4% higher. The power spectrums from the Merlot wavelet transformation suggest that the density of transaction activities is high at the high-frequency level, proving that the momentum strategy is less effective within a month-wide window.TOPICS: Mutual fund performance, indexing exchange-tradedKey Findings• The average probability of the equity market realizing another positive return after the previous positive return is 51.80%, the probability of the third positive return after two positive days is 50.64%, 47.98% after three days, and 45.98% after four days.• The US equity market carries negative return resistance. The average probabilities of the market realizing positive return after one, two, three, four, and five days of consecutive negative returns are 52.88%, 54.63%, 56.55%, 57.17%, and 60.09% across the 11 sectors.• Small-cap stocks exhibit momentum effect in positive return environment but mean reversion effect in negative returns. The probabilities of continuing positive trend are higher for value stocks; yet the probabilities of stopping negative trend are higher for growth stocks.
ER -