How does momentum work in international equity markets?

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AcadiFi · Accepted Answer

Momentum — buying recent winners and shorting recent losers — has been one of the most robust international equity anomalies. **Standard construction**: Rank stocks by prior 12-month return excluding the most recent month (to avoid 1-month reversal). Go long top decile, short bottom decile, rebalance monthly or quarterly. **Empirical results (1990–2024)**: - US momentum premium: ~6.5% annualized. - International developed momentum: ~8.2% annualized. - Emerging markets momentum: ~9.1% annualized. - Global momentum (cross-border): ~7.8% annualized. **Why international momentum works**: (1) Slow diffusion of information across borders — European news takes time to be priced by US-based investors and vice versa. (2) Cross-border frictions and delayed analyst revisions. (3) Currency-driven momentum — stocks with appreciating local currency get extra USD-reported momentum. Worked example: Azure Meridian Quant runs a cross-border momentum strategy. Monthly universe: MSCI ACWI constituents. Scoring: 12-month ex-1-month return in USD. Long top 10% = 280 stocks, short bottom 10% = 280 stocks, country-neutral within regions. 2020–2025 performance: +9.4% annualized gross, +7.1% net of costs. **Risks and costs**: - Momentum crashes — March 2009 momentum factor fell 35% in one month as losers rallied. - High turnover — 200%+ annualized, transaction costs matter. - Crowding — factor crowdedness has risen in recent years. - Currency leakage — if unhedged, momentum can overlap with FX momentum. ```mermaid graph LR A[Rank: 12-month
return ex-1m] --> B[Top decile
LONG] A --> C[Bottom decile
SHORT] B --> D[Monthly
rebalance] C --> D ``` Most quant shops apply country-neutrality and sector-neutrality to prevent momentum from collapsing into a country or sector bet.

How does momentum work in international equity markets?

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