What Explains Momentum? A Perspective From International Data

There is as yet no consensus on why equity markets permit momentum, although the literatureproposes several explanations. Our analysis uses out-of-sample international datato consider a “horse race” across existing empirical proxies for momentum rationales usedby earlier studies. Our central finding in cross-sectional analyses is that the proxy for thefrog-in-the-pan (FIP) hypothesis, which posits that due to limited attention, investors underreactto information that arrives gradually rather than in concentrated doses, consistentlywins. Also, internationally, momentum is stronger in less volatile markets and in up-markets.The FIP proxy indicates that information flows more gradually during these market states,implying additional support for the hypothesis