Market State, Investor Sentiment and Momentum in New Zealand Equities

Abstract

The state of the market and investor sentiment are found to be crucial in determining the profitability of momentum strategies in New Zealand between 1987 and 2011. Momentum effects are lowest following neutral market and sentiment periods, and greatest following up market and optimistic sentiment periods. In my view, this is due to the cognitive biases of investors being accentuated by emotion during strong bull or bear periods. On the other hand, investors are less emotive during a stationary market phase. Domestic macroeconomic factors are unable to explain momentum returns. Results are robust to capital asset pricing model (CAPM) and Fama-French (1993) risk adjustments.