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

• Published in: Research in international business and finance 2023-04, Vol.65, p.101908, Article 101908
• Main Authors: Eom, Cheoljun, Park, Jong Won
• Format: Article
• Language: English
• Subjects: Asian stock markets; Momentum; Principal component momentum; Small-cap stocks; US stock market
• ISSN: 0275-5319
• DOI: 10.1016/j.ribaf.2023.101908

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. [Display omitted] •Principal Component Momentum measure (PMOM) is introduced as a new measure.•Momentum is investigated by combining PMOM with the arbitrage-weighting method.•The Asian stock markets are attributed to small-cap stocks in the loser portfolio.•The U.S. stock markets are attributed to small-cap stocks in the winner portfolio.•This study robustly shows the applicability and expandability of the PMOM methodology.