Momentum strategies in times of economic policy uncertainty

Purpose This paper aims to evaluate the influence of economic policy uncertainty (EPU) on the momentum effect, analysing its influence depending on the economic cycle and in different quantiles. Design/methodology/approach To determine the influence of EPU in the momentum effect taking into account the economic cycle and the level of the quantile, linear regression and quantile regression have been applied for the period from 2 January 1985 to 30 April 2019 for the US stock market. Findings It is shown that an increased feeling of insecurity associated with EPU reduces the momentum effect, especially in times of recession. Distinguishing by quantiles, an asymmetry in the impact of EPU in the momentum effect is discovered, finding that EPU reduces (increases) the profits of momentum strategies in the lowest (highest) quantiles. In the highest quantiles, an investor can obtain higher extraordinary returns with this strategy. For example, in the highest quantile, a one-point increase in the EPU levels would have increased the daily profitability by 12.7 basis points. These findings have important implications for investors and policymakers. Originality/value To the best of the authors' knowledge, this is the first paper that evaluates the influence of EPU on the momentum effect by conducting an analysis based on the economic cycle and different quantiles, demonstrating how these factors are relevant in the influence of this uncertainty in the momentum anomaly.