Abstract
This paper examines the relationship between product market competition and intermediate-term relative strength strategies in the U.S. over the past two decades, i.e., from 1997 to 2016. As industries become increasingly concentrated, I find that return reversal patterns are observable only in competitive industries. As the industry concentration level (ICL) increases, these patterns gradually disappear and reverse in the highly concentrated industry quintile. The performance of intermediate-term relative strength strategies is affected by not only the product market competition level but also recent recessions. In the sample, I find no reliable and robust momentum effect. These results shed new light on the relationship between the product market competition levels and the performance of intermediate-term relative strength strategies.
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Notes
Li (2016) used ICBIN industries, which generate 10 industry sectors for U.S. firms. The most competitive industries are the bottom two industries with the lowest HHI.
LH (12,3) means portfolios that are formed based on the past 12-month (with montht-1 excluded) accumulative momentum returns and then held for 3 months before rebalancing.
The SIC code is a four-digit code available from both the CRSP and the Compustat database. However, there are discrepancies between the two sources, as documented by Kahle and Walking (1996).
All variables are winsorized at the 1% level (0.5% on each side).
In the HHI equation, i is an individual firm, j is the industry to which firm i belongs, and t is the year.
Montht-1 is excluded to avoid the bid-ask bound.
The years 2001, 2008, and 2009 are officially recognized as economic recession periods by the National Bureau of Economic Research (NBER). Source: https://www.nber.org/cycles.html
SMB is the size premium (small minus big). HML is the book-to-market premium (high minus low). UMD is the premium from a zero-cost portfolio that is long on winners and short on losers based on the past 12-month accumulative returns.
RMW is the profitability premium (robust minus weak). CMA is the investment premium (conservative minus aggressive). The FF factors are downloaded from Kenneth French’s website: https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
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Acknowledgement
I want to thank Dr. Qianqiu Liu (Professor of Finance, Shidler College of Business, University of Hawaii at Manoa) for his advice and continuous support in my researches related to product market competition and stock returns. I am very grateful to Editor Dr. Markus Schmid and an anonymous referee for their detailed and valuable comments on earlier versions of the paper. All remaining errors are my own.
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Li, S. Product market competition and intermediate-term momentum. Financ Mark Portf Manag 35, 255–267 (2021). https://doi.org/10.1007/s11408-020-00371-3
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DOI: https://doi.org/10.1007/s11408-020-00371-3