Studies in Economics and Finance

Purpose – The purpose of this paper is to examine the relationship between a stock market's index returns and its subsequent firm-level momentum profits. This relationship is analysed for each of ten individual European stock markets between 1973 and 2010.

Design/methodology/approach – Using firm-level data, intra-market momentum returns are analysed, using various ranking and holding period combinations. Standard t-tests as well as pooled and country-specific regressions are employed to determine the significance of the non-linear relationship between one-, two- and three-year index returns and subsequent momentum returns.

Findings – Momentum returns following a bull market are positive for all ten stock markets; statistical significance is reached by nine of those ten. Per contrast, momentum returns following a bear market are insignificant for all ten stocks markets, and the average return is negative. Further, in all ten stock markets the momentum profits are lowest following the greatest drops in the index; this effect is significant in eight countries. These results are consistent with the behavioural theories on investors' overconfidence and undue self-attribution.

Practical implications – The paper's findings suggest that investors should refrain from pursuing a momentum strategy in European stock markets shortly after a severe bear market.

Originality/value – This is the first study to investigate the temporal dependence of firm-level momentum returns on preceding index movements in European stock markets.