Determinants of Winner–Loser Effects in National Stock Markets

In this study, the determinants of profits to momentum/contrarian strategies were examined when applied to national stock market indexes. Using monthly stock market index data of 16 countries from December 1969 to December 2000, it is found that momentum strategies are profitable over horizons from 3 to 12 months, while contrarian strategies are profitable for long horizons such as 2 years or longer. However, the profit is statistically significant for only the 6-month horizon. The present decomposition analysis indicates that international momentum/contrarian profits are mainly due to the autocorrelations in these national market index returns, not to cross-serial correlations or to cross-sectional variation in their mean returns. Consistent with the trading strategy results, it is also found that most of the stock market indexes follow a mean-reverting process, implying positive autocorrelations in short-horizon returns and negative autocorrelations in long lags.