Time-series momentum as an intra- and inter-industry effect: Implications for market efficiency

• Trend continuation is largely an intra-industry rather than a market-wide effect.
• Rejections of return predictability on aggregate level can be spurious.
• Momentum can travel across industries reflecting the phenomenon of sector rotation.
• Time-series momentum can also be experienced as an inter-industry effect.
• Actively managed trading strategies are unlikely to outperform the passive approach.

Existing studies on time-series predictability in equity returns base their analysis on the usage of a broad market index or individual stocks showing that trend chasing trading rules have largely been futile. This paper shows that trend continuation is predominantly an intra-industry rather than a market-wide or a single-company effect. After adjusting for data snooping bias, trend chasing trading rules achieve superior predictability for a number of sectors and industries in the 1990s. A simultaneous application of trading rules to each sector or industry individually yields superior predictability on the aggregate market level in the 1990s implying that time-series momentum can also be experienced as an inter-industry effect, i.e., momentum can travel across industries reflecting the phenomenon of sector rotation. Sector and industry portfolios exhibit no predictability in their returns in the 2000s due to a persistent negative autocorrelation in their return series. A sharp and sustained rise in correlations between sectors and industries observed since the early 2000s makes it difficult for actively managed trading strategies to outperform the passive benchmarks.