Market States and Momentum


  • Michael J. Cooper,

  • Roberto C. Gutierrez Jr.,

  • Allaudeen Hameed

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    • Cooper is from the Krannert Graduate School of Management, Purdue University. Gutierrez is from the Lundquist College of Business, University of Oregon. Hameed is from the NUS Business School, National University of Singapore. We gratefully acknowledge financial support from the John and Mary Willis research award (Cooper), a Summer Research Grant from the Department of Finance at Texas A&M (Gutierrez), and an Academic Research Grant from the National University of Singapore (Hameed). We thank Kent Daniel, Ken French, Simon Gervais, Eric Ghysels, Christo Pirinsky, Bhaskaran Swaminathan, and seminar participants at the University of Colorodo, University of Utah, and University of Virginia for their helpful discussions. Comments from the editor, Rick Green, and an anonymous referee are also gratefully acknowledged. Any errors are our own.


We test overreaction theories of short-run momentum and long-run reversal in the cross section of stock returns. Momentum profits depend on the state of the market, as predicted. From 1929 to 1995, the mean monthly momentum profit following positive market returns is 0.93%, whereas the mean profit following negative market returns is −0.37%. The up-market momentum reverses in the long-run. Our results are robust to the conditioning information in macroeconomic factors. Moreover, we find that macroeconomic factors are unable to explain momentum profits after simple methodological adjustments to take account of microstructure concerns.