Macromomentum: Returns Predictability in International Equity Indices*

This study examines momentum and reversals in international stock market indices. We find that country stock indices exhibit momentum during the first year after the portfolio formation date and reversals during the subsequent 2 years. Positive currency momentum predicts low stock index returns in the future, thereby weakening momentum and strengthening reversals in U.S. dollar-denominated stock index returns. Cross-sectional regression tests involving individual stock indices confirm the portfolio findings. Our results are consistent with a key prediction of recent behavioral theories, that initial momentum should be accompanied by subsequent reversals.