The relation between earnings and price momentum: Does it vary across regimes?
Review of Quantitative Finance and Accounting
This paper investigates the time-varying relationship between earnings momentum and price momentum. Using a Markov-switching framework, allowing for variation between high volatility and low volatility states, we find that price momentum is significantly more influenced by earnings momentum in the high volatility state. Further for price momentum we find that loser firms display a higher degree of differential response to earnings momentum across the low and high volatility states than winner firms. Limited financing and investor sensitivity to future investment opportunities might explain these two results. Additional analysis indicates that loser firms tend to be more financially constrained. The results are robust using alternative instrument variables.
Earnings momentum, Financial constraints, Markov regime-switching, Price momentum
Zheng, Yao; Wei, Peihwang; and Osmer, Eric, "The relation between earnings and price momentum: Does it vary across regimes?" (2022). NIU Bibliography. 27.
Department of Finance