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Price behavior of small-cap stocks and momentum: A study using principal component momentum

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  • Eom, Cheoljun
  • Park, Jong Won

Abstract

This study analyzes why the negative momentum effect appears in Asian (China, Japan, Korea) stock markets, contrary to the U.S. market. We use principal component momentum (PMOM), a newly devised momentum measure. The PMOM is constructed by extracting commonalities from traditional momentum measures using principal component analysis. The results show evidence of positive and negative momentum profits in the U.S. and Asian markets, respectively. Negative momentum profits in Asian markets are attributable to the strong performance reversal of small stocks in the loser portfolio. Conversely, the positive momentum profits of the U.S. market are driven by the performance continuity of small stocks in the winner portfolio. The PMOM strategy is significantly more advantageous than traditional momentum strategies, based on the economic and statistical perspectives of momentum profits. These results are robust to changes in empirical designs.

Suggested Citation

  • Eom, Cheoljun & Park, Jong Won, 2023. "Price behavior of small-cap stocks and momentum: A study using principal component momentum," Research in International Business and Finance, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:riibaf:v:65:y:2023:i:c:s027553192300034x
    DOI: 10.1016/j.ribaf.2023.101908
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    More about this item

    Keywords

    Momentum; Asian stock markets; US stock market; Principal component momentum; Small-cap stocks;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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