Momentum Crashes in the US Stock Market During Different Market States and the Impact on Industries

Abstract

This paper documents investment strategies that buy the best-performing stocks and sell the worst-performing stocks based on past returns. The momentum anomaly has proved to be a profitable and widely used strategy among investors. Research has found that momentum investment also experiences substantial losses, called momentum crashes. This thesis investigates the behavior of cross-sectional and industry momentum during and succeeding recessions. Exploring data in the US Stock market during 1965-2022, we find that individual stock momentum, especially within industries, tends to result in more excessive returns, and therefore experience more extreme crashes compared to industry momentum. Covid-19 shows indications of the same pattern of a momentum crash during the market rebound, as with earlier studies of crises and the Dot-Com Bubble. We observe no distinct patterns between the