Momentum and mean-reverting approaches are two primary methods for trading linear (delta-one) assets. Their effectiveness depends on several factors, such as time horizon, investor behavior, liquidity, etc. Reference [1] conducted a comprehensive literature review of momentum and mean-reverting approaches. It aims to answer two questions:
- How have momentum and contrarian approaches performed in different stock markets according to past research?
- What factors influence the success or failure of both approaches according to empirical evidence across countries and periods?
The authors pointed out,
This study concludes that momentum and contrarian investment strategies exhibit effectiveness that is highly dependent on market context, investment period, and the behavior and structure of market participants. Momentum strategies are shown to generate abnormal returns in the short term, particularly in markets with low to medium levels of information efficiency. In contrast, contrarian strategies tend to provide more significant returns in the long run, especially in markets dominated by retail investors and prone to overreaction. The results also show that there is no one universally superior strategy, its success is largely determined by the time horizon, market conditions (bullish vs bearish), the risk model used, and the underlying market microstructure. In addition, recent research trends show a shift towards more adaptive and complex strategies, such as volatility-based momentum, switching strategies, and the use of behavioral indicators such as investor attention. However, challenges remain, such as the risk of momentum crashes, transaction costs, and limited generalizability across markets.
In short, the effectiveness of momentum and mean-reverting approaches depends on multiple factors. Investors should adapt them to their specific markets.
The article also suggests future directions for improving these methods.
In addition, the development of strategies based on market regime changes (bullish-bearish) and the integration of alternative data such as social media sentiment or online search could be promising new approaches. Microstructure research is also needed to better understand how momentum and contrarian strategies work in the hands of retail versus institutional investors.
Let us know what you think in the comments below or in the discussion forum.
References
[1] Wayan Eka Heltyani, Made Surya Negara Sudirman, Effectiveness of Momentum and Contrarian Strategies: A Systematic Literature Review Across Countries, Models, and Market Conditions, The Journal of Financial, Accounting, and Economics Vol. 2, Issue. 2, July (2025), 111- 130
Further questions
What's your question? Ask it in the discussion forum
Have an answer to the questions below? Post it here or in the forum
