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On the interaction between momentum effect and size effect
Author(s) -
Alhenawi Yasser
Publication year - 2015
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2015.03.005
Subject(s) - stock (firearms) , momentum (technical analysis) , economics , econometrics , monetary economics , financial economics , geography , archaeology
This paper uses a sample of firms listed in the NYSE, AMEX, and NASDAQ between January 1963 and December 2012 to analyze the interaction between size effect and momentum effect in cross‐sectional stock returns. Furthermore, this paper focuses on the evolution of this interaction through different market states. I report a significant shift in stock returns structure during the rising markets of the 1990s and the 2000s. First, momentum has absorbed the size effect. Second, the momentum effect has become stronger in larger, not smaller, firms. These patterns are indicative of a strong interaction between the two effects. Conceivably, in up markets, firms grow fast, and thus, the size and momentum effects stem from a common economic phenomenon: growth. The findings are robust to variations in the length of the formation period and to the use of residual return (instead of total return) to rank stocks.