Cross-Sectional and Time Series Momentum Returns and Market States

Recent evidence on momentum returns shows that the time series (TS) strategy outperforms the cross-sectional (CS) strategy. We present new evidence that this happens only when the market continues in the same state, up or down. In fact, we find that the TS strategy underperforms the CS strategy when the market transitions to a different state. Our results also show that the difference in momentum returns between TS and CS strategies is related to both the net long and net short positions of the TS strategy.