Momentum in real economy and industry stock returns

This study investigates the relationship between the real economy and stock prices in the context of momentum strategies. While past research has examined momentum in terms of data embedded in market activity, we show that momentum is affected by data from real activity. Using United States sectoral output indices, we show that once the industry effect is considered, the momentum in stocks may lose significance in many cases. In several strategies, the influence of real sectors generates significant anomalous returns and remains robust even when the influence of stock indices is taken into account. The presence of momentum may imply that the world market factor should be augmented with a momentum factor. However, beyond mechanically accounting for a momentum factor without the proper economic mechanism that establishes its relevance, multifactor models are criticized for purely matching the data rather than basing it on solid economic arguments. This paper responds to this criticism by attempting to understand the source of the cross-country model from a real-output perspective. (C) 2021 Elsevier B.V. All rights reserved.