Rank and Sign Momentum in Japan

Abstract

While momentum has remained one of the most persistent equity anomalies in empirical asset pricing, Japan has stood out as a country where the phenomenon does not exist. This is unusual given Japan's sophisticated and comprehensive capital market system that rivals its peers in other developed nations such as the United States and the United Kingdom. This paper offers a challenging perspective: Japan's market does exhibit momentum but the process to identify momentum profits needs to be more refined. A non-parametric measure may be better at identifying momentum profits since Japan's stock market returns are skewed and leptokurtic. The driver of this phenomenon in Japan is due to limited attention and how investors respond to salient versus non-salient price movements. A non-parametric measure dampens the effects of salient stocks allowing for a more stable profit strategy and can capture non-salient stock information held within stock returns that normally causes an underreaction in investors. This paper demonstrates that using a non-parametric form of momentum does produce statistically significant profits in Japan that are not as prone to the effects of salient stocks thus producing an underreaction.