Market Cycles and the Performance of Relative Strength Strategies

Authors

  • Chris Stivers,

  • Licheng Sun

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    • Chris Stivers is a Professor of Finance at the University of Louisville in Louisville, KY. Licheng Sun is an Associate Professor of Finance at Old Dominion University in Norfolk, VA.


  • We thank an anonymous referee, Bob Connolly, Jennifer Conrad, Mike Cooper, Ro Gutierrez, Marc Lipson (Editor), John Scruggs, Savannah Short, Jeff Wongchoti, Yexiao Xu, Sterling Yan, Jonathan Albert, and seminar participants at the University of Georgia, the University of Missouri, the College of William and Mary, Florida State University, Old Dominion University, the Federal Reserve Bank of Atlanta, and the Financial Management Association and Southern Economic Association meetings for comments. Earlier drafts were presented under the title “Momentum Profits when Mean Stock Returns Vary across Economic Regimes.”

Abstract

We study the effect of market cycles on both medium-run and long-run relative strength trading strategies. We find that payoffs for both strategies tend to be relatively higher within a market state (rising or falling markets), but substantially lower over transitions between states. Since shorter duration strategies are relatively less likely to include market transitions, our results help reconcile the puzzling fact that medium-run strategies are profitable, but long-run strategies are not. We find that the market's cross-sectional return dispersion: 1) tends to be higher around market transitions, and 2) is negatively related to the subsequent payoffs for both medium-run and long-run strategies.

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