Market states and international momentum strategies

Cooper, Gutierrez, and Hameed [Cooper, M., Gutierrez Jr., R., Hameed, A. (2004). Market States and Momentum. Journal of Finance, in press] find that momentum profits derive from the “up” market; they claim that this is due to investor overconfidence. This paper examines their proposition in an international context and finds qualified support: momentum profits exist only in the up market but this holds for only two of three market state classifications based on past returns. A further test using lagged world industrial production growth to classify market states largely supports the proposition, although (statistically insignificant) profits also arise in the down market.