Market states, expectations, sentiment and momentum: How naive are investors?

Emilios C. C Galariotis (1) , Phil Holmes (2) , Vasileios Kallinterakis (3) , Xiaodong S. Ma (4)

1 Audencia Recherche
2 Leeds University Business School
3 University of Liverpool
4 WBS - Warwick Business School

Following Cooper et al. (CGH) 2004 we test whether market states are relevant for predicting UK momentum profits. However, rather than simply categorising up/down markets based on actual prices as CGH, we suggest that investors may view expectations and/or sentiment as important. Contrary to the findings for the US, we find that momentum returns are not related to CGH-defined market states. Similar findings hold for an expectations-based split. In contrast, for the whole sample period, construction and retail sentiment indicators explain differences in momentum profits. However, robustness tests suggest that their explanatory power is driven by the post-subprime crisis period.

Keywords: Momentum; Futures; Expectations; Sentiment; Market states

Domains: Economics and Finance

Emilios C. C Galariotis, Phil Holmes, Vasileios Kallinterakis, Xiaodong S. Ma. Market states, expectations, sentiment and momentum: How naive are investors?. International Review of Financial Analysis, 2014, 32, pp.1-12. ⟨10.1016/j.irfa.2013.12.004⟩. ⟨hal-00943345⟩