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International Momentum Strategies
Abstract
International equity markets exhibit medium-term return continuation. Between 1980 and 1995 an internationally diversified portfolio of past medium-term Winners outperforms a portfolio of medium-term Losers after correcting for risk by more than 1 percent per month. Return continuation is present in all twelve sample countries and lasts on average for about one year. Return continuation is negatively related to firm size, but is not limited to small firms. The international momentum returns are correlated with those of the United States which suggests that exposure to a common factor may drive the profitability of momentum strategies. Copyright The American Finance Association 1998.
... Following their study, many other researchers have documented comparable outcomes using Momentum strategies across a variety of datasets and periods. Saying so, profits are also found in 12 European nations, according to Rouwenhorst (1998). Moreover, Conrad and Kaul (1998) published data that back to Jegadeesh and Titman's prior studies (1993). ...
... Moreover, Conrad and Kaul (1998) published data that back to Jegadeesh and Titman's prior studies (1993). Likewise, Rouwenhorst (1998) discovered an identical return pattern in emerging economies, however, the average yield on these markets is lower than in the previous study in the United States and Europe. In addition, he discovers that, contrary to previous research, the loser portfolio generates positive returns. ...
... Furthermore, the Winner portfolio, which includes the 33.1/3 percent of firms with the highest past J-month returns, and the Loser portfolio, which includes the 33.1/3 percent of firms with the lowest past J-month returns, are created every month. In the same thoughts, Stocks are divided into ten decile portfolios by Jegadeesh & Titman (1993) and K. Rouwenhorst (1998). To increase the power of statistical tests, the studied strategies include portfolios with overlapping holding periods (Partial Rebalancing), where each portfolio rebalances at the start of each month, meaning that in any given month "t," various J-month/K-month strategies hold series of portfolios that were selected in the current month and the previous K -1 month. ...
... The most active institutions in this field were the University of Vaasa and National Chi Nan University, with 11 and eight articles, respectively, followed by Tian Jin University and Brock University, with six and five articles, respectively ( Figure 8). National United University, Universiti Kebangsaan Malaysia, University (2002) 19 Chan et al. (1996) 800 Jegadeesh and Titman(2001) 19 Rouwenhorst (1998) 789 Carhart (1997 19 Ang and Chen (2002) 684 Barroso and Santa-Clara (2015) 16 Moskowitz and Grinblatt (1999) ...
... PageRank score Asness (2013) 0.03138075 Rouwenhorst (1998) 0.024877714 Menkhoff et al. (2012a) 0.021372475 Korajcyk and Sadka (2004) 0.01834987 Hong et al. (2000) 0.018122649 Okunev and White (2003) 0.017714136 Lustig et al. (2014) 0.017584497 Menkhoff et al. (2012b) 0.017584497 Fama and French (2012) 0.017456293 Liu and Zhang (2008) 0.017445708 Table 6. Top 6 articles based on page rank analysis in Cluster 3 ...
... 3.3.2.2 Cluster 2: Theories explaining momentum returns and implications for asset pricing and market efficiency. Rouwenhorst (1998) demonstrates momentum returns across 12 countries and confirms that international momentum markets are interlinked with the USA, which advocates that momentum profitability is driven by exposure to a conjoint factor. The author also illustrates that return continuation is negatively related to firm size but not to a small firm. ...
Abstract
Purpose
Over the past three decades, numerous conceptual and empirical studies have discussed momentum investment strategies’ presence, pervasiveness and persistence. However, science mapping in the field is inadequate. Hence, this study aims to comprehend and explore current dynamics, understand knowledge progression, elicit trends through thematic map analysis, synthesize knowledge structures and provide future research directions in this domain.
Design/methodology/approach
The study applies bibliometric analysis on 562 Scopus indexed articles from 1986 to 2021. Biblioshiny version 3.1.4, a Web-based application included in Bibiliometrix package developed in R-language (Aria and Cuccurullo, 2017), was used to examine: the most prominent articles, journals, authors, institutions and countries and to understand the thematic evolution and to elicit trends through the synthesis of knowledge structures including conceptual, intellectual and social structures of the field.
Findings
Motor themes, basic transverse, niche and emerging and declining themes were identified using (Callon, 1991) strategic thematic map. Besides, four major clusters based on a cocitation network of documents were identified: empirical evidence and drivers of momentum returns, theories explaining momentum returns and implications for asset pricing and market efficiency, avoiding momentum crashes and momentum in alternative asset classes, alternative explanations for momentum returns. The study infers that momentum research is becoming multidisciplinary given the dominance of behavioral theories and economic aspects in explaining the persistence of momentum profits and offers future research directions.
Research limitations/implications
The study deploys bibliometric analysis, appropriate for deriving insights from the vast extant literature. However, a meta-analysis might offer deeper insights into specific dimensions of the research topic. Besides, the study’s findings are based on Scopus indexed articles analyzed using bibilioshiny; the database and software limitations might have affected the findings.
Practical implications
The study is a ready reckoner for scholars who intend to recognize the evolution of momentum investment strategies, current dynamics and future research direction. The study offers practitioners insights into efficiently designing and deploying momentum investment strategies and ways to avoid momentum crashes.
Social implications
The study offers insights into the irrational behavior and systematic errors committed by market participants that helps regulators and policymakers to direct investors’ educational efforts to minimize systematic behavioral errors and related adverse financial consequences.
Originality/value
This comprehensive study on momentum investment strategies evaluates research trends and current dynamics draws a thematic map, knowledge progression in the field and offers future research directions.
... They reported a significant monthly average momentum profit of 1.49% when adopting a zero-cost momentum strategy of buying past winners and selling past losers. Similar results have also been documented in prominent cross-country studies such as Rouwenhorst (1998) who found momentum returns across all European stock markets. Rouwenhorst (1999) noted that 85% and 15% of the sample countries exhibited positive and negative momentum returns, respectively. ...
... Subsequent studies on momentum returns confirmed the existence of momentum profits outside of the U.S. markets. Rouwenhorst (1998) for instance, analysed 12 European stock markets from 1978 to 1985 that included United Kingdom, Switzerland, Sweden, Spain, Norway, Netherlands, Italy, Germany, France, Denmark, Belgium and Austria. He documented the past six months of winner stocks which outperformed the past six months of loser stocks by 1% per month in all the 12 European markets. ...
... If higher information technology and use of the Internet wiped out the momentum effect, then all else being equal, developed countries, should have a lower momentum effect as compared to developing countries. This contention was not supported by existing studies which found that developed countries exhibited higher momentum effect than their developing counterparts (Rouwenhorst 1999(Rouwenhorst , 1998. ...
Purpose
Momentum returns are considered an anomaly in the finance literature as their existence cannot be fully explained under the asset pricing paradigm. This study attempts to shed more light on this anomaly by investigating the determinants of momentum returns.
Design/methodology/approach
The panel data technique is applied to the sample of 40 countries worldwide from 1996 to 2018. The authors use the panel-corrected standard error (PCSE) model to estimate the coefficient of World Governance Indicators (WGI), whereas the fixed effect model is used to determine the coefficient for corporate governance indicators (CGIs). The choice of PCSE estimation methods is guided by the fact that WGI variables are subjected to serial correlation, heteroskedasticity and cross-sectional dependence problems while CGI variables are not. Furthermore, a composite WGI index is constructed using principal component analysis (PCA).
Findings
Regression analysis shows a negative and significant relationship between WGI index and momentum returns. The negative coefficient value of WGI supports the prediction of the overreaction hypothesis, which postulates a lower behavioral bias in the market with high governance quality. Breaking down of the WGI by their six indicators reveals that four of the indicators (control over corruption, government effectiveness, stability and avoidance of violence) are negative statistically significant with momentum returns while two indicators are not significant. As for CGIs, only one (strength of investor protection) of the four tested indicators is negative and significantly related to momentum returns.
Originality/value
The study fills the gap in economic literature by highlighting the association between governance quality at the country (WGI) and firm level (CGI) on stock momentum returns.
... Jegadeesh and Titman (2) conducted the same analysis from 1990 and 1998 and obtained similar results. This phenomenon was also documented for other geographical regions, including 12 European markets (3). ...
... Other studies link the performance of momentum strategies with the characteristics of stocks. For instance, the profits collected through the momentum effect appear to be negatively linked with the characteristics of the issuers (1)(2)(3). In comparison, other studies state that there is no evidence that the higher returns of momentum strategies are only associated with stocks of small size but are present in every dimension category. ...
This study reports survivorship bias for the momentum effect. Effectively, this study shows that the Portuguesestock market does not exhibit the “momentum effect” when all listed stocks are considered spanning the periodfrom January 1991 to December 2016. However, this phenomenon was detected when only survivor stocks areused. This study also shows that average returns for momentum portfolios were similar before and after the 2007financial crisis
... According to Duxbury and Yao [64], the commonly accepted definitions of momentum (buying positive return stocks and selling negative return stocks) and contrarian (selling positive return stocks and buying negative return stocks) trading strategies imply that investors employ the same strategies on both sides of their trades (i.e. to their buys and sells). In the United States [52,65,66], the United Kingdom [67], and other European stock markets [68,69], momentum or contrarian trading strategies have been found to deliver abnormal returns throughout various time horizons. As a result, it would be interesting to investigate whether investors who abandon the investing strategies (i.e., contrarian strategies) suggested by technical trading rules (SOI, RSI, and BB trading rules) and switch to other investing strategies (i.e., momentum strategies) would still make profits, and even high profits, given that the primary concern of investors is to make money. ...
... Furthermore, Conrad and Kaul [87] demonstrated that, while a contrarian strategy generates statistically significant profits over long time horizons, a momentum strategy is typically profitable over medium time horizons (3-12 months), indicating that investors may choose different investment strategies based on their investment horizon. Moreover, similar findings have been reported in previous studies [68,[88][89][90]. Thus, we examine subsequent index performance as oversold signals emitted by the SOI, RSI, and BB trading rules at the outset, utilizing various holding period return measures (HPRs). ...
... Jagadeesh and Titman found the "momentum effect" by studying the US stock market [1]. Then Rauwenhorst studied the European stock market and found that there is a significant momentum effect, which exists significantly in the stock markets of developed countries, but not in some emerging stock markets [2]. ...
... Rouwenhorst found a significant momentum effect in European stock markets and Hou and Tonks also found a significant momentum effect in the UK market [2,5]. significant momentum effects were found. ...
Momentum effect is a hot topic of research in both academia and industry, and it is also a key point of whether 'chasing the upside and downside' strategy can be adopted. Many studies in the whole Chinese A-share market show that there is no significant momentum effect, and in order to further dissect the existence of momentum effect in the Chinese stock market, this paper selects the monthly stock data of the Science and Technology Innovation Board (SSE STAR Market) from 2020 to 2022 monthly stock data to test the momentum effect based on the grouping of turnover rates on the momentum strategy construction method of Jagadeesh and Titman. The empirical study finds that: (1) there is no significant momentum effect in the monthly frequency of both high and low turnover rates in China's STAR market; while there is a significant momentum effect in the medium turnover rate; (2) the combined momentum effect of medium-term and long-term is most significant in the medium turnover rate. (3) There is no significant reversal effect in the monthly portfolio in the whole STAR market.
... Lee and Swaminathan (2000, LS) argue that the degree of investor overconfidence is reflected in the volume of trading 4 and hence use this quantity as a proxy for overconfidence. We test 1 Jegadeesh and Titman (2011) and Subrahmanyam (2018) review the momentum literature. 2 See Rouwenhorst (1998), Griffin, Ji, and Martin (2003), and Asness, Moskowitz, and Pedersen (2013), for evidence that momentum strategies are profitable in many non-U.S. markets. ...
... The medians are slightly greater than the means, and momentum profits are more volatile and more negatively skewed for Developed ex-U.S. Thus, our updated sample results confirm earlier international momentum evidence in Griffin, Ji, and Martin (2003) and Rouwenhorst (1998). ...
... Jegadeesh and Titman first discovered the momentum effect in the US market [1]. After that, many scientists have proved that momentum effect could obtain effective benefits in the markets of Europe, America, Australia, etc [2][3][4][5][6]. But others have found some different phenomena. ...
... Subsequently, studies found that momentum effect also existed in other countries and regions. Rouwenhurst [3] studied the data from 1980 to 1995 of 12 European countries (Australia, Belgium, Germany, France, Denmark, Italy, the Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom), and found that momentum effect (3 months) existed in all mature markets except Japan. In the study of China's A-share market, Wang and Zhong [8] studied the momentum strategy return in a shorter time (holding period of 1-4 weeks). ...
... This research delved into momentum's existence across a variety of global markets, asset classes, and temporal frameworks. One case in point is Rouwenhorst expanded the evidence of momentum strategies to 12 European countries' equity markets [6]. His conclusion aligns with the original momentum studythe degree of predictability was just as strong as in the U.S. ...
This paper thoroughly examines behavioral finance, challenging traditional financial theories by questioning investor rationality and market efficiency. Focusing on five key phenomena—loss aversion, short-term momentum, long-term reversal, framing effect, and endowment effect—the analysis relies on real-world observations to reveal how psychological biases significantly impact investor decisions and financial markets. Loss aversion, especially evident during financial crises, highlights humans' tendency to avoid potential losses rather than pursuing equivalent gains. The study explores short-term momentum and long-term reversal, challenging market efficiency theories by illustrating how past performance influences future returns. Emphasizing cognitive biases like framing and endowment effects, the paper underscores their role in diverse investment decisions and irrational asset overvaluation based on a sense of ownership. It advocates for incorporating these biases in financial models, regulations, and investment strategies, emphasizing their importance for stakeholders to navigate the financial landscape, minimize instability, and capitalize on opportunities. The research establishes a foundation for a holistic finance approach, respecting and leveraging human behavior for market stability and benefit.
... The return on the reversal effect is tied to the choice of backtesting period, and survivor bias can amplify the reversal effect. there is extensive evidence for what is known as the momentum effect, which is the tendency of stocks that perform well in the previous 6-12 months to perform well in the next 6-12 months [4,6]. At shorter intervals, researchers find reversals. ...
Traditional economics assumes that humans make rational decisions within optimally functioning markets, but real human behavior is only partially rational. Behavioral economics has emerged to address phenomena in financial markets that traditional economics cannot explain, such as the herd effect and the small firm effect. This shift challenges assumptions in traditional finance, prompting a reevaluation of human behavior as the cornerstone of economic and financial understanding. This paper delves into behavioral economics, focusing on the loss aversion theory and its emotional impact on economic decision-making. It analyzes market anomalies, including the momentum effect and long-term reversal, revealing how investor emotions can drive market volatility and asset prices deviating from their reasonable values. The framing effect is explored, demonstrating how scenario formulation changes can alter preferences in decision-making. The paper also discusses the endowment effect in the financial market, explaining its existence and its influence on investors' decisions and the overall market. By examining these aspects, the study finds that people's overreaction to market information can behaviorally impact investment decisions, leading to market anomalies and influencing price trends. The insights provided contribute to a more nuanced understanding of behavioral economics and its implications for financial systems.
... more than half of the impulse gains explain macroeconomic risk factor risk play an important role in driving momentum gains. " International equity markets show a continuation of medium-term performance" (Rouwenhorst, 1998). continuation of the returns are present in the sample of twelve countries and lasts on average for one year. ...
The study analyzes the future stock returns affected by different sets of criteria in an emerging
market of Pakistan and importance of momentum strategy to predict future stock returns. Trading
strategies that buy past winners and sell past losers realize significant abnormal returns over the
period of January, 2009 to December, 2016. We construct 15 portfolios based on mentioned criteria.
Results show that high dividend paying companies in short & medium term follow the momentum
strategies while in long run might be followed contrarian strategy. Similarly, high medium and low
paying companies in long run do not follow momentum but in short and medium run they follow
momentum. As pointed out by (George li, 2016) that on future stocks and price momentum, dividend
payout ratio has a significant impact. Interestingly for the medium-run all securities of the different
sets of criteria have a positive and significant effect, which means they follow momentum in future.
The study is helpful for funds managers who are responsible for organizing practical plans on the
behalf of the financiers. The findings of this study are helpful to them in measuring the performance
of the stock market and it is also supportive in making buying and selling decisions.
... The goal of our paper is instead to use Almost Stochastic Dominance (ASD) to form zero cost portfolios that yield systematic abnormal returns. ASD is rst proposed by Leshno and Levy (2002) and further rened by Tzeng, Huang and Shih (2013) that can overcome the drawback of 1 See for example, De Bondt and Thaler (1985,1987), Grinblatt and Titman (1992), Jegadeesh andTitman (1993, 2001), Moskowitz and Grinblatt (1999) and Rouwenhorst (1998). 2 The time-series insights of the literature's prior ndings also indicate that skewness is an important determinant of equilibrium asset returns (see for example, Barberis and Huang, 2008;Brunnermeier, Gollier and Parker, 2007;Mitton and Vorkink, 2007; Boyer, Mitton and Vorkink, 2010). ...
This study employs data from the Taiwan stock market to demonstrate the potential for capitalizing upon the momentum eect by exploiting the Almost Stochastic Dominance rules. Relative to classic momentum, our novel strategy achieves better risk-adjusted performance, and exhibits lower volatility and reduced negative skewness in returns. The abnormal returns are statistically and economically signicant when testing against alternative common risk factors. Most interestingly, the strategy's ability to generate excess returns is particularly pronounced when using shorter-term ranking and holding periods. Notable improvements in computational eciency suggest that practical implementability of the strategy shall prevail in cases where a large span of assets is considered.
... 8. French (1998, 2012) and Hou et al. (2011), among others, have examined size and book-tomarket effects in international equity markets. The cross-country momentum phenomenon has also been investigated by Rouwenhorst (1998), Griffin et al. (2003), Chui et al. (2010), Fama and French (2012) and Asness et al. (2013). ...
National cultures significantly explain cross-country differences in the relation between asset growth and stock returns. Motivated by the notion that managers in individualistic and low uncertainty-avoiding cultures have a higher tendency to overinvest, this study aims to show that the negative relation between asset growth and stock returns is stronger in countries with such cultural features. Once the researchers control for cultural dimensions, proxies associated with the q-theory, limits-to-arbitrage, corporate governance, investor protection and accounting quality provide no incremental power for the relation between asset growth and stock returns across countries. Evidence of this study highlights the importance of the overinvestment hypothesis in explaining the asset growth anomaly around the world.
... Momentum trading is a trading strategy whereby investors buy past winners and sell past losers. Numerous studies point out that a hypothetical investor who follows momentum trading strategy can generate significant positive returns in the short term (see, e.g., Tittman, 1993, 2001;Rouwenhorst, 1998). Performance persistence in mutual funds further confirms the possibility of realizing abnormal return by chasing past winner funds (Goetzmann and Ibbotson, 1994;Grinblatt and Titman, 1992;Hendricks et al., 1993). ...
Using a unique dataset on over one million 401(k) traders, we investigate momentum trading in 401(k) plans. We identify momentum traders in each quarter and evaluate how these traders perform. Results indicate the existence of momentum traders. However, there is no evidence that they successfully improve their portfolio performance. Instead, momentum sellers sell the outperformed funds. Overall, momentum traders could lose up to 2.14% per year. In seeking to explain such losses, we observe that 401(k) momentum traders follow a naïve momentum strategy. They do not have the ability to select funds with momentum investing styles but, instead, simply chase past returns.
... Oppositely, we adopt a term, Individual Momentum [33], to refer to those momentum characteristics of an asset that are constructed from its own past returns. It is worth noting that cross-sectional momentum [24,38,36,40], as a result of ranking the individual momentum of a universe of assets, are not considered as network momentum. ...
We investigate the concept of network momentum, a novel trading signal derived from momentum spillover across assets. Initially observed within the confines of pairwise economic and fundamental ties, such as the stock-bond connection of the same company and stocks linked through supply-demand chains, momentum spillover implies a propagation of momentum risk premium from one asset to another. The similarity of momentum risk premium, exemplified by co-movement patterns, has been spotted across multiple asset classes including commodities, equities, bonds and currencies. However, studying the network effect of momentum spillover across these classes has been challenging due to a lack of readily available common characteristics or economic ties beyond the company level. In this paper, we explore the interconnections of momentum features across a diverse range of 64 continuous future contracts spanning these four classes. We utilise a linear and interpretable graph learning model with minimal assumptions to reveal the intricacies of the momentum spillover network. By leveraging the learned networks, we construct a network momentum strategy that exhibits a Sharpe ratio of 1.5 and an annual return of 22%, after volatility scaling, from 2000 to 2022. This paper pioneers the examination of momentum spillover across multiple asset classes using only pricing data, presents a multi-asset investment strategy based on network momentum, and underscores the effectiveness of this strategy through robust empirical analysis.
... In an early study of momentum strategies, Jegadeesh and Titman (1993) reported statistically significant positive factor returns for momentum in the US stock market. Rouwenhorst (1998Rouwenhorst ( , 1999 reported through empirical analysis that momentum also earns positive factor returns in stock markets worldwide, that is, outside the US. However, unlike other stock markets worldwide, the Japanese stock market has been the subject of debate because its momentum factor returns are not significant. ...
In this study, we decompose momentum indicators for the Japanese stock market into two components, high-to-price and price-to-high. High-to-price has a lower downside risk and higher Sharpe ratio than price-to-high. We find that a conventional momentum strategy combines the characteristics of high-to-price in a bull market and those of price-to-high in a bear market. In particular, the large drawdowns of momentum strategies reported in previous studies seem to be largely owed to those of price-to-high in bear markets. It is possible that the mechanism generating factor returns differs among the three strategies.
... At present, online portfolio algorithms can be divided into five categories [24]: benchmark strategy [25], follow the winner strategy [26], follow the loser strategy [27], pattern matching strategy [28] and meta learning algorithm [29]. Benchmark strategy is a standard algorithm often used to compare the advantages or disadvantages of new algorithms. ...
... Their analyses in the years 1975-1997 showed a reversal in the rates of return for one-month periods, even after adjusting them for risk and specificity of the company, and also for longer periods, up to 3 years. Thus, the research results are different from those for the American market (Jegadeesh and Titman, 1993) and other highly developed markets (Rouwenhorst, 1998;Griffin et al. 2003;Chui et al. 2010;Stork 2011), where in the short term the rates of return were most often maintained from 3 months to 1 year -the momentum effect. Analyses of the Japanese market indicate that the overreaction of the market may be partly related to the low volume of losers' shares and is not sensitive to changes in the economic situation on the stock market. ...
When making investment decisions in financial markets, investors use various investment strategies. The traditional ones include the contrarian strategy and the moment strategy. In recent years, one of the dynamically developing segments of the global financial market has been the American REIT market. The literature on the subject lacks research on the effectiveness of investment strategies in this market. The aim of the article is therefore to compare the effectiveness of the contrarian strategy and momentum strategy on the US REIT market in different ranking periods. Based on the data on the rates of return of individual REITs listed on public capital markets in the US, the rates of return resulting from the application of the contrarian and momentum strategies were estimated. The results of the conducted analyses showed that for the three-year ranking period, the rates of return of the portfolio composed of loser REITs significantly exceeded the rates of return of the portfolio of winner REITs. This means that during this period the use of the contrarian strategy was more effective than the use of the momentum strategy. For other analysed ranking periods, the differences in rates of return were not statistically significant. The results of the conducted analyses may help investors in choosing the most effective investment strategy on the REIT market. This research also answers the question whether the REIT market should use investment strategies that, according to research, are effective on the broad stock market, or strategies that work well on the investment fund market.
... Its fundamental tenet, built on the ideas of Tversky and Kahneman (1974), is that pricing anomalies are due to widespread cognitive biases, as they generate limited perception and processing of information and imperfections in the decision-making process (see Hirshleifer 2015, for a recent review of the topic). Two of the most pervasive and widely investigated pricing anomalies are short-run momentum and long-run reversal: extreme excess returns tend to be followed by excess returns with the same sign over short time periods (3-12 months) and revert over longer horizons (see, e.g., Thaler 1985, 1987;Titman 1993, 2001;Rouwenhorst 1998;Moskowitz and Grinblatt 1999;Balvers et al. 2000;Gropp 2004;Griffin et al. 2005;Chui et al. 2010;Mukherji 2011;Asness et al. 2013). These pieces of evidence, in striking contrast with the Efficient Market Hypothesis of Fama (1970), sprinkled the interest of economists and led to the study of several behavioural market models in which these two effects emerge (see, among the others, Barberis et al. 1998;Daniel et al. 1998;Hong and Stein 1999;Daniel and Hirshleifer 2015;Bottazzi et al. 2019;Luo et al. 2021). ...
This chapter investigates whether a behaviourally biased agent is able to persistently maintain a positive consumption share when trading in the market with a Bayesian agent. The question is addressed by recasting a popular model of investor sentiment in a general equilibrium framework. Our evolutionary stability analysis complements standard Behavioural Finance studies, where a biased representative agent is usually considered to explain deviations from rational pricing. In fact, if the biased agent asymptotically disappears from the market, then misvaluation patters generated by its behaviour do not survive in the long term. We find that, despite the existence of generic cases in which the biased agent succumbs, the learning process with behavioural biases displays a good degree of evolutionary stability.KeywordsLearningMarket selectionInvestor sentimentModel misspecificationFinancial marketsJEL ClassificationC60D53D81D83D91G11G12
... Such momentum occurred because of underreaction or delayed overreaction by the investor to respond to the market information (Nagel, 2002). Their researches supported by other researchers in the late 1990 and early 2000 such as Rouwenhorst (1998), Rouwenhorst (1999), Hameed & Yuanto (2000), Kang et al. (2002), which documented how relative momentum strategy could generate positive abnormal returns on developed and developing countries for 1980-1997. ...
In some circumstances, especially in the crisis period, conventional or relative
strength momentum strategy has led to a momentum crash, giving rise to a negative return for investors. As a consequence, many researchers have developed new momentum strategies which had better performance than relative momentum strategy as they have been proven could withstand the extreme volatility in the crisis period, such as (1) residual momentum strategy, (2) absolute strength momentum strategy, and (3) removing stocks with extreme absolute
strength. The purpose of this research is to examine the outcome of those new momentum strategy alternatives during Covid-19, one of the potential crisis periods that could lead to a momentum crash, which will be divided into 4 phases from the beginning until the recovery period. This research uses the Fama-French three factors asset pricing model in regression to calculate the abnormal return generated by those strategies in the Indonesia Stock Exchange, specifically LQ45 stocks (high liquidity and large market capitalization stocks). This study shows that at the beginning of Covid-19, no strategy could generate a positive abnormal return. However, the absolute strength momentum strategy could generate a positive abnormal return during the crash and recovery period. Meanwhile, the other strategies have proven worse to be
implemented in the crash and recovery phases of Covid-19 than the absolute strength
momentum strategy. This research contributes to the existing literature by analyzing new momentum strategy alternatives for investors to optimize their portfolio return, especially during a crisis.
... This finding has been confirmed by many other academic studies, some even dating back to the 19th century. Momentum strategies tend to have high turnover rates, which can reduce the net return of a momentum strategy [9][10][11]. Some even claim that transaction costs wipe out momentum profits. ...
... Dengan kata lain, pergerakan harga saham individual dalam jangka waktu menengah cenderung untuk mengikuti suatu pola tertentu, yang konsekuensinya investor dapat menggunakan pola tersebut untuk meramal harga saham dalam masa depan, serta untuk melakukan suatu strategi perdagangan yang bertujuan mendapatkan abnormal return. Beberapa penelitian, seperti Jegadeesh dan Titman (1993), Rouwenhorst (1998Rouwenhorst ( dan 1999, Chui, Titman dan Wei (2000), Lee dan Swaminathan (2000), Glaser dan Weber (2002), melaporkan bahwa eksploitasi strategi momentum (untuk selanjutnya disebut dengan momentum) memang menghasilkan keuntungan yang cukup signifikan. Momentum tidak tampak pada periode pendek, yaitu 1 bulan atau kurang dimana pada rentang waktu tersebut, harga-harga akan cenderung tampak lebih acak. ...
... In their seminal work, Jegadeesh and Titman (1993) show that in US stock markets, past winners (losers) continue to be winners (losers) over the next six months to a year. Similar patterns have been documented in various asset classes, including international stocks ( Rouwenhorst, 1998 ), bonds ( Jostova et al., 2013 ), commodities ( Miffre and Rallis, 2007 ), and currencies ( Menkhoff et al., 2012 ). Moskowitz et al. (2012) introduce the time-series momentum (TSMOM) strategy, which is determined only by an asset's past returns-that is, prior one-to twelve-month returns positively predict future returns for different asset classes (see also Kim et al., 2016 ;Goyal and Jegadeesh, 2018 ). ...
We examine the profitability of a cross-asset time-series momentum strategy (XTSMOM) constructed using past changes in crude oil–implied volatility (OVX) and stock market returns as joint predictors. We show that employing the past changes in OVX in addition to past stock returns helps better predict future stock market returns globally. The XTSMOM outperforms the single-asset time-series momentum (TSMOM) and buy & hold strategies with higher mean returns, lower standard deviations, and higher Sharpe ratios. The XTSMOM can also forecast economic cycles. We contribute to the literature on cross-asset momentum spillovers as well as on the impacts of crude oil uncertainty on stock markets.
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... https://www.barclayhedge.com/solutions/assets-under-management/cta-assets-undermanagement/ 4Jegadeesh and Titman (1993),Rouwenhorst (1998), andMoskowitz and Grinblatt (1999) explore momentum strategies in stock markets. 5 This study focuses on cross-sectional momentum strategies, while several studies explore time-series momentum strategies in commodity futures markets(Szakmary et al., 2010;Moskowitz et al., 2012;Georgopoulou and Wang, 2017). ...
This study decomposes the momentum factor (MOM) in the commodity futures market. A high‐to‐price (HTP) factor generates a higher Sharpe ratio than a price‐to‐high (PTH) factor. We uncover that the profitability mechanisms across three momentum factors are different. The positive returns on MOM and PTH are associated with overconfidence and strong self‐attribution. In contrast, HTP is linked to investors' underreaction and the information diffusion process. Moreover, we find that positive demand shocks raise the return on HTP.
... Starting from the evidence of Jegadeesh and Titman (1993), finance scholars have shown that momentum returns have actually existed for 212 years, that is from 1801 to 2012 (Geczy and Samonov, 2013), are common to more than 40 countries (Rouwenhorst, 1998;Asness, Moskowitz and Pedersen, 2013) and to many asset classes (Asness et al. 2013), crash from time to time (Daniel and Moskowitz, 2016), and are driven by firm-specific attributes such as revenues, costs, and growth options (Sagi and Seasholes, 2007) ...
In this paper we provide a literature review of the main factors-based asset pricing models, focusing in particular on factors related to firm characteristics. After presenting the Capital Asset Pricing Model, we describe first the most important empirical evidence that led to the well-known Fama-French three-factors model. Next, we highlight the most widely used multi-factors pricing models based on momentum, liquidity, investment and profitability, also outside the U.S. Finally, we discuss the ability of firm characteristics to predict the behavior of future stock returns.
... Momentum anomaly has been attributed to various factors like sectoral returns (Liu & Zhang, 2008;Moskowitz & Grinblatt, 1999), past trading volume (Lee & Swaminathan, 2000), investor biases in their processing of information (Barberis et al., 1998), macro-economic variables (Chordia & Shivakumar, 2002) and positive earnings surprises (Novy-Marx, 2015). Several mature and emerging markets have been studied in empirical literature and momentum and contrarian anomalies have been identified in various mature and emerging markets (Antoniou et al., 2007;Chui et al., 2010;Hanauer & Lauterbach, 2019;Rouwenhorst, 1998;Vu, 2012) When less liquid (low volume) stocks offer higher returns over more liquid (higher volume) stocks, it is characterized as a liquidity anomaly. Returns have been found to have a negative relationship with liquidity as the investors have to be compensated for the risk of holding stocks with poor liquidity. ...
We examine prominent market anomalies and evaluate the efficacy of alternative asset pricing models under different financial integration settings. A financial integration index is developed for classifying 25 sample markets into high-, medium- and low integration groups. Size is found to be the strongest anomaly in world markets, followed by value and liquidity. Value and profitability effects are larger for low-integrated markets. Highly integrated markets experience short-term momentum while many low-integrated markets exhibit mild reversals. Fama and French five-factor model outperforms capita l asset pricing model (CAPM) and Fama and French three-factor model in explaining returns. International factors augment the role of local factors for more integrated markets. Our study has implications for global investors to design anomaly based investment strategies.
... Table 3 also shows that adjusted momentum returns are even stronger than raw results reported in Table 2. The greater sensitivity to the common risks of high-volatility loser industries may explain the stronger positive relationship between volatility and momentum returns after controlling for common risk factors shown in Table 3 (Rouwenhorst, 1998;Jegadeesh and Titman 1993;Arena et al., 2008). The returns of high-volatility losers may be lower after controlling for common risk factors if they are sensitive to risk factors, resulting in higher momentum returns of high-volatility groups. ...
Motivated by the importance of industry volatility and the profitability of industry momentum strategy, this study investigates the relationship between realised volatility and industry momentum returns. The analysis uses daily return data for 48 US industries from July 1969 to June 2021 to calculate realised volatility and to gauge the raw return effect on short- and medium-horizon double-sort momentum-trading strategies. The findings show that past volatility positively relates to industry momentum and that this relationship is stronger after controlling for common risk factors (market, size, value, investment, and profitability). Decomposing the realised total volatility into idiosyncratic and systematic components, this study reveals that both decomposed components are positively related to industry momentum returns. The findings are robust to alternative measures of volatility.
... Cependant, la théorie de l'efficience des marchés est très normative, car elle se base sur le fait que les investisseurs ont accès à la même information, ils l'utilisent de la même manière, ils ont les mêmes opportunités d'emprunt et de placement et ils prennent toujours leurs décisions sur une base rationnelle en maximisant le profit tout en minimisant le risque. Or, plusieurs études empiriques viennent démontrer qu'il est possible de constituer des stratégies d'investissements actives permettant de battre systématiquement le marché (Jegadeesh, 1990; O 'Shaughnessy, 1997;Rouwenhorst, 1998;Swinkels, 2004). Dès lors, plusieurs études se sont penchées d'expliquer ces anomalies du marché en cherchant les facteurs de risque influençant les rendements, dits anormaux, des titres boursiers, à savoir : le facteur taille des compagnies, le facteur marché, le facteur croissance, le facteur valeur, etc. Fama et French (1996) ont justifié les rendements anormaux des titres en utilisant quatre facteurs de risque : 1) le ratio cours/bénéfice; 2) le ratio cours/valeur comptable; 3) la capitalisation de la compagnie; et 4) le beta du marché (Fama & French, 1996). ...
Many researches has been done on the issue of predictability and performance of stocks. Investors have long sought to find investment strategies in stock portfolios that outperform normal market performance using a variety of models. To this end, investors collect the data produced by the various financial systems to find patterns helping to predict and select the best securities. However, the complex nature, the speed of production, the volume and the large dimension of data constituting an obstacle to the application of classical models to data in order to extract knowledge from it. Hence, other "data mining" models are taking up space in the area of prediction and stock selection. This article will present a literature review on the question of the stock performance predictability as well as an overview on the classical and "data-mining" models most used in the evaluation and the prediction of stock profitability.
... The findings from the descriptive statistics of the research variables (Table 1) are in line with those of Banz (1981), Jegadeesh and Titman (1993), Fama and French (1992, Rouwenhorst (1998), and Liew and Vassalou (2014) and support the presence of a value, size and momentum effect. ...
This paper provides insights about the information content and predictive ability of the intrinsic value of the firm in an asset pricing context. The intrinsic value of a firm is of great importance for both the management and the investors of the company. We seek to assess whether the value-to-price (V/P) ratio, estimated with the residual income model (RIM), can explain the cross section of stocks returns. The study enhances the literature in the area of asset pricing by developing a new intrinsic value risk factor, which is a zero-investment portfolio that is neutral to the size, book-to-market equity ratio and the momentum effect. Furthermore, we incorporate in the RIM, for the first time, a time-series model that does not rely on analysts’ forecasts for the estimation of the key parameters of the model. A unique dataset from Greece, Italy, Spain and Portugal is utilized, from 31/12/2000 to 30/6/2019, that has a number of idiosyncrasies that are not observable in other developed markets, contributing by this way to the necessary accumulation of non-US research. The results show that the new intrinsic value risk factor absorbs the information content of the HML factor and explains better the cross section of returns, mainly for small size and high book to market value companies.
... 4 Notable exceptions include a few recent studies by Louis and Sun 3 A large body of asset pricing research documents that security prices underreact to news over short horizons of 6-12 months (momentum), and overreact to news over long horizons of 3-5 years (return reversals). For example, see De Bondt and Thaler (1985), Titman (1993), (2001), and Rouwenhorst (1998). 4 For example, prior studies show that target public status, bidder size, market-to-book ratio, form of the deal (i.e., merger vs. tender offer), and method of payment (i.e., cash vs. stock) are significantly related to bidder announcement returns (e.g., Lang, Stulz, and Walkling (1989), Servaes (1991), (2010), Baker, Pan, and Wurgler (2012), and Ma, Whidbee, and Zhang (2019). ...
We document a strong positive initial market reaction to merger announcements from bidders with either large earnings growth or significant earnings decline, relative to those with neutral earnings change, reflecting a U-shaped pattern between bidders’ earnings growth and announcement returns. However, the higher initial returns for bidders with earnings decline subsequently reverse, whereas the higher returns for bidders with high growth do not. We further show that the return patterns are driven by a tendency for retail investors to gamble that merger and acquisition deals initiated by poorly performing bidders will generate high synergies.
... This type of algorithm includes many learning models discussed in the literature, such as the behavioral model in Barberis et al. (1998), the exponentially weighted average forecaster in Cesa-Bianchi and Lugosi (2006), the Prod(η) algorithm of Cesa-Bianchi et al. (2007), the Soft-Bayes algorithm of Orseau et al. (2017), the non-Bayesian learning process studied in Sandroni (2005) and Epstein et al. (2010), and the Bayesian model itself. We investigate the presence of event-driven, conditional, momentum (or continuation) and reversal anomalies (De Bondt and Thaler, 1985;Titman, 1993, 2001;Rouwenhorst, 1998;Moskowitz and Grinblatt, 1999;Balvers et al., 2000;Asness et al., 2013) and we are able to derive general but simple sufficient and/or necessary conditions for their emergence. ...
This paper studies the occurrence of price momentum and reversal in a general equilibrium setting, with complete markets and expected utility maximizing agents. We show that price anomalies can generically emerge when agents derive their individual probabilities from reinforcing and progressive learning processes defined over misspecified models.
... In a stream of related articles, Fama and French [9,10] argue, following Merton's [11] Intertemporal CAPM (ICAPM) framework, that the discernible superior returns of size and value portfolios are the compensation for some extramarket risk. ere is substantial evidence to suggest that the premiums earned by these fundamental risk characteristics are indeed pervasive across emerging and developed markets [10,[12][13][14][15][16][17][18][19]; Sehgal and Jain, 2011, [20,21], and [22]. Momani [23], in his study on Amman stock Exchange, favors using Carhart Model over the F&F model in practical applications. ...
This study compares the three-factor model (F&F model) proposed by Eugene Fama and Kenneth French with Daniel and Titman’s Characteristics Model (D&T model) using the data of Indian stock returns for the period of 25 years from 1993 to 2018. Three-way sorting (3 × 2 × 2) of stocks based on the B/M ratio and size of the firms, and then by SMB, HML, or ex-ante β loadings, is formulated to design thirty-six portfolios. Regression and rolling regression are applied to the data under study. Results obtained by the F&F model, despite its shortcomings, are found more conclusive than the D&T model for distinguishing between characteristics and covariances for returns on Indian stock. This study favors the F&F model over the D&T model.
... In the United Kingdom, foreign ownership increased from 4% to 54% and in the U.S., it tripled from 5% to 15% (De La Cruz et al., 2019). 2 Please refer to Adler and Dumas (1983), Dumas and Solnik (1995), De Santis and Gerard (1998), and Zhang (2006) for information about currency risk factors in international asset pricing. 3 For the size factor (SMB), value factor (HML), profitability factor (RMW) and investment factor (CMA), please see Fama and French (1998, 2012 and Capaul et al. (1993); for the momentum factor (WML), see Rouwenhorst (1998), Chan et al. (2000) and Griffin et al. (2003); for the betting against beta (BAB) factor, see Frazzini and Pedersen (2014); for the quality-minus-junk (QMJ) factor, see Asness et al. (2019)). In empirical research, Hou et al. (2011) and Asness et al. (2013) form different value and momentum factors in their international asset pricing tests. ...
To identify the best global factor pricing model is crucial in international asset pricing literature. This study adopts the Bayesian methods of Chib et al. (2020) and Chib and Zeng (2020) to estimate and compare 14,322 Gaussian and Student-t distributed global factor pricing models. We find strong evidence that Student-t distributed models significantly outperform Gaussian distributed models in both in-sample and out-of-sample tests. This finding highlights the importance of using the Student-t distributions to model the fat tails in global risk factor data. Analysis reveals that the best global factor pricing model is a Student-t distributed factor model with three degrees of freedom and seven risk factors including the six factors of Fama and French (2018) and the betting against beta (BAB) factor of Frazzini and Pedersen (2014). Our results are robust for different estimation samples and in both relative and absolute pricing performance tests. JEL classification: G11, G12 [Paper download link (up to 4 Sept., 2022): "https://authors.elsevier.com/c/1fQAz3IvUnclbq"]
... Literature suggests that the momentum effect, as identified by Jegadeesh and Titman (1993) for the U.S. stock market, has differing degrees of manifestion across countries (Jegadeesh and Titman, 1993;Rouwenhorst, 1998;Griffin et al., 2005;Asness et al., 2013;Ruenzi and Weigert, 2018;Chui et al., 2010;Boubaker et al., 2021). However, research evidences that the traditional momentum effect does not exist in the Chinese, Japanese, and Korean markets, as compared to other important capital markets (Grundy and Martin, 2001;Kang et al., 2002;Wu, 2011;Pan et al., 2013;Hung and Banerjee, 2014;Blitz et al., 2020;Gao et al., 2021). ...
We explore the missing momentum effect in the Chinese stock market from the perspective of individual investor preference. Creating a comprehensive individual investor preference index to investigate the missing momentum effect, we find that the momentum effect diminishes toward absence in Chinese-market stocks with particularly high-levels of individual investor preference. In contrast, momentum manifests with decreases in individual investor preference. Contributing to the literature, we provide a new explanation of the missing momentum effect.
... trading the extremes (e.g., top and bottom deciles) of the ranked list. Since Jegadeesh and Titman (1993), which demonstrated the profitability of this strategy on US equities, the literature has been galvanized by a broad spectrum of works-ranging from technical refinements spanning varying levels of sophistication (Pirrong 2005;Baz et al. 2015;Gu, Kelly, and Xiu 2021;Kim 2019) to reports documenting the ubiquity of momentum in different asset classes and markets (LeBaron 1996;Rouwenhorst 1998;Griffin, Ji, and Martin 2003;Erb and Harvey 2006;Chui, Titman, and Wei 2010;de Groot, Pang, and Swinkels 2012). Unlike the extensive works focused on equity momentum, currency momentum is centered on the time series of individual currency pairs and is often cast as technical trading rules for which Menkhoff and Taylor (2007) provided a broad overview. ...
... With the end of the 1970s and the beginning of the 1980s, an increasing number (Harvey et al., 2016) of so-called anomalies distressed financial markets researchers. The most prominent ones are the size (e.g., Banz, 1981;Reinganum, 1981;Brown et al., 1983;Keim, 1983;Lamoureux and Sanger, 1989;Asness et al., 2018), value (e.g., Stattman, 1980;Rosenberg et al., 1985;Fama andFrench, 1992, 1993), and momentum effect (e.g., Jegadeesh, 1990;Jegadeesh and Titman, 1993;Rouwenhorst, 1998;. ...
This dissertation is not only a pioneer work in the new finance sphere cultural finance, but also a feat of fundamental research in international empirical asset pricing. I present significant evidence that the most basic stock characteristic, the nominal price, is consequential for stock returns (and associated with higher statistical moments) in a comprehensive cross-country dataset comprising 41 countries and a culture-dependent capital market anomaly (as it was already shown e.g. for the momentum effect).
For the case of Germany, I additionally provide an in-depth analysis of the price effect (i.e. a high/low price of an asset goes hand in hand with high/low subsequent returns) as this country offers a unique possibility to investigate the evolution and trigger of this genuinely price-based capital market anomaly due to a rapid and dramatic countrywide dispersion of stock prices in the aftermath of law amendments.
Furthermore, I find the explanatory power of risk factor mimicking hedge portfolios (especially RMRF, HML, and WML, i.e. the beta, value, and momentum factors), which are consistently implemented in empirical asset pricing models (like the FF 3-, 5-, and 6-factor models and the Carhart 4-factor model), as well as their effectiveness as investment styles to vary across cultures.
That is, the spectrum of this dissertation strikes both implications of the weak EMH that time series data (like the price) should have no informational value for future returns and assumptions of theoretical asset pricing models that (only) systematic risk (CAPM), future investment opportunities (ICAPM) or consumption risk (CCAPM) drives asset returns (universally).
Finally, yet importantly, I find evidence that even cultural characteristics in itself (measured via the cultural dimensions of Hofstede and others) have explanatory and predictive power for global, cross-sectional stock returns as well as characteristics-based (hedge) portfolio returns. By virtue of these contributions to pertinent financial research, this dissertation is an empirical primer for possible future fields of research culture-based/culture-neutral asset pricing, asset management, and asset allocation.
... 3 See Daniel and Moskowitz (2016) Momentum, as a phenomenon, exists not only on the US stock market. Rouwenhorst (1998Rouwenhorst ( , 1999 captures momentum on markets internationally, of course then it must be present for country stock indices, which Asness et al. (1997) confirm in their findings. Okunev andWhite (2001), Menkohf et al. (2012) explore momentum on currency markets. ...
This paper implements machine learning techniques to risk management of the winner-minus-losers trading strategy. A nested cross-validation procedure is used for dynamic choice of most relevant predictors. This is done to illustrate that ex ante specification of model in risk management task can act as a source of risk itself. Even the most simplistic statistical model as a kernel of cross-validation pipeline produces significant improvements in portfolio quality, profit levels and corresponding risk measures. A vector of further research is stated. Implementation of the model is of direct practical value and can be used for prediction of weight in momentum strategy, with a high probability of outperforming existing management techniques.
... Returns from momentum effect are earned by going long in winner portfolio and short in loser portfolio of stocks, ranked on the basis of recent past returns (Jegadeesh and Titman, 1993). There is extensive international evidence on existence of momentum profits for the duration of 3 to 12 months (Rouwenhorst, 1998;Chan et al., 2000;Moskowitz and Grinblatt, 1999;Hong et al., 2000;Lee and Swaminathan, 2000;Jegadeesh and Titman, 2001;O'Donnell and Baur, 2009;Chui et al., 2000;Sehgal et al., 2012;Jain, 2011, 2015;Ansari and Khan, 2012). Number of studies has also explained momentum profits. ...
... A large and growing literature uncovers cross-sectional return predictability based on past price moves. There is extensive evidence for what is known as the momentum effect, which is the tendency of stocks that performed well in the previous 6-12 months to perform well in the next 6-12 months (Jegadeesh and Titman, 1993;Rouwenhorst, 1998). At shorter intervals, researchers find reversals. ...
Different share classes on the same firms provide a natural experiment to explore how investor clienteles affect momentum and short-term reversals. Domestic retail investors have a greater presence in Chinese A shares and foreign institutions are relatively more prevalent in B shares. These differences result from currency conversion restrictions and mandated investment quotas. We find that only B shares exhibit momentum and earnings drift and only A shares exhibit monthly reversals. Institutional ownership strengthens momentum in B shares. These patterns accord with a setting where short-term reversals (which represent inventory risk premia) prevail in a market dominated by noise traders and momentum prevails in markets where noise traders are less prevalent relative to informed investors who underreact to fundamental signals. Overall, our findings confirm that clienteles matter in generating stock return predictability from past returns.
... (de Bondt and Thaler 1985) menyatakan bahwa portofolio dengan return masa lalu negatif mengalahkan portofolio dengan return masa lalu yang positif pada periode jangka panjang. Berbeda dengan hasil penelitian yang dilakukan oleh (Rouwenhorst K. Geert 1998), terjadi return continuation pada portofolio saham di 20 negara eropa. Portofolio yang berisi saham diversifikasi internasional dengan return masa lalu yang positif mengalahkan portofolio dengan return yang negatif pada periode jangka menengah. ...
This study is aimed to find out the investment strategy and investment performance betwen foreign investrors and domestics investror who have transaction in Indonesia Stock Excange. A Proxy used to see the Investment Strategy and Investment Performance in this study is the Trading Profit from transaction wich has been done by the investors. Investment strategy chossen bt investors can be seen from the investor’s tendency in doing some sales which contains some shareds with positive and negative valued trading profit. Investment Performance is seen from the investor’s capability in producing positive valued trading profit. This study used intra-day transaction data which are transacted by foreign investors and domestic investors. The result of this study found that foreign investors used a momentum when transacting in the stock excange and domestics investor using a contrarian when transacting in the stock excange. This study olso found that there isn’t defferent performance between foreign investors and domestik investors in stock excange transactions activities.
... Our study is based on Fama & French (2012), their study focusses on size pattern in examining the value and momentum effect in worldwide equity market. Same nature of studies is conducted in Europe, Japan, North America, emerging markets and developed equity markets of Asia Pacific by Rouwenhorst (1998), Cakici, Fabozzi & Tan (2013) and Cakici and Tan (2014). ...
The study inspects the size and liquidity pattern in Pakistan equity market. Sample size contains 278 non-financial firm's monthly data listed on Pakistan Stock Exchange (PSX) from 2001 to 2012. This study uses three asset pricing models (eq.5), (eq.6) and (eq.7). Four factors asset pricing model estimates that momentum factor is positively and negatively linked with winner and loser stocks, both in size and liquidity patterns. Although it is observed that the presence of size and liquidity does not affect the coefficient results but average value of momentum premium in larger in liquidity than size pattern. Further, the study reveals high average stock returns on momentum strategy in liquidity pattern than size that is 8.05% Vs 6.67%, respectively. Results of this study contradicts Fama & French (2012) who concluded that size pattern in momentum factor outperform the equity market. But this study conclude that liquidity pattern outperforms the size pattern in momentum factor. This study raises the question that should investors and academicians consider size or liquidity pattern in momentum factor for high returns and future research?
This study uses a unique dataset of transactions at the account level to construct investor networks. These networks are then analyzed to examine the role of the network centralization index in identifying the stock momentum stages. The empirical results demonstrate that the early stage strategy of purchasing winner stocks with a low centralization index and selling loser stocks with a high centralization index outperform the simple momentum strategy. Conversely, the late-stage strategy of buying winner stocks with a high centralization index and selling loser stocks with a low centralization index underperforms the simple momentum strategy. Unlike prior research, the momentum effect in the Taiwanese stock market is particularly evident with an early stage strategy. Additionally, the regression analysis shows that the interaction between past cumulative returns and the centralization index significantly influences future returns, even after controlling for liquidity and investor attention variables. The impact of arbitrage frictions on momentum profits across different holding periods was also examined, with early stage strategies proving profitable for stocks facing severe arbitrage constraints. Moreover, this study investigates the influence of investor sentiment and market state on momentum, finding that early stage strategies perform better following periods of high sentiment and up-market states. Utilizing information networks can facilitate the identification of stock momentum stages.
This study aims to examine whether there is any evidence of momentum in Moroccan industries and whether these momentum returns are attributed to the market status, UP and Down based on monthly data from December 1997 to December 2019. The portfolio methodology was used to classify 17 Moroccan industries within four portfolios; each portfolio constitutes 25% of Moroccan industries. The 3-factor model of Fama and French was employed to consider the risk-adjusted returns. The results showed that there is ample evidence and statistically significant momentum returns in Moroccan industries. The sub-sample findings support the evidence of momentum. This study also shows that momentum returns in the Moroccan industry are not exclusive to the UP or DOWN market because momentum returns are present in both “Up” and “Down” markets. These results are important for investors to design their investment strategies and take advantage of the momentum returns in Moroccan industries. This study contradicts the efficient market hypothesis because of the inability of the Fama-French 3-factor model to account for momentum profits; therefore, the paper recommends using the Fama-French five-factor model.
This paper studies the predictive power of the trend strategy in the international stock market. Using data from 49 markets, we find that a trend signal exploiting the short‐, intermediate‐, and long‐term price information can predict stock returns cross‐sectionally in the international market. The significance of the trend strategy is associated with market‐level characteristics such as macroeconomic conditions, culture, and the information environment. The trend premium is more pronounced in markets with a more advanced macroeconomic status, a higher level of information uncertainty and individualism, and better accessibility to foreign investors. Nevertheless, the trend strategy only outperforms the momentum strategy in a relatively short horizon.
p>This thesis is dedicated to the study of the broad subject of market anomalies. Within this framework, three specific finance problems are investigated in depth, namely: 1 – An event study focusing on the FTSE100 index changes which evidence structural change over time in this well known anomaly; 2 – The investigation of interim and final companies’ results announcements as sources of extreme events in the company lifetime. 3 – The pricing of options and the effect of the underlying asset expected return on their valuation.
The first part studies the effect of UK companies being promoted or relegated from the FTSE100 index to the FTSE250 on the share price. The data sample consists of all the index promotions since the constitution of the index in 1984 until November 2004. It is split into four characteristic time periods of the lifetime of the FTSE100 index (1984-1989; 1990-1994; 1995-1999; 2000-2004) in an attempt to observe alterations in investor behaviour to index changes along time, and how these relate to the prevailing explanations in the academic literature. I find evidence for structural changes over time in the share behaviour upon promotion/relegation to the FTSE100 index. These findings show support for price-pressure hypothesis and permanent share price change depending on the time-window and time period under study. For index promotions, the results support mainly a permanent share price increase, which is not related to an increased traded volume and therefore is likely to be information-related. For relegations, support for a permanent share price decrease is weak and we find evidence for price-pressure within shorter time-windows that is associated with larger average daily traded volumes.
The second part of the thesis investigates companies’ interim and final results announcements as possible sources of extreme events in the company return distribution. We find that on these dates even though there is no evident share return pattern either with evidence of an abnormal return on the event date or cumulative abnormal returns before or after the event, there is strong evidence of higher dispersion of the abnormal returns on the event date.
The third and fourth parts investigate the effect of the underlying asset return on the valuation of options. We first examine the problem theoretically by obtaining a closed form expression that relates the expected value of the call option with the Black-Scholes value. We then provide, in part four, empirical evidence of the effect of historical returns on the Black-Scholes implied volatilities (IVs). We show that our expression for the expected value of the call option can explain the empirical observations that show a strong relation between past returns and IVs. We conclude that the market uses underlying asset expectations to price options, which should not occur under the Black-Scholes conditions.</p
Recent studies show that most financial market anomalies exhibit a momentum effect. Based on two datasets, (i) an original 22-factor sample and (ii) a more comprehensive 187-factor sample, we find that factor momentum effect is weak at the individual factor level. In both samples, only about 22%– 27% of the factors exhibit strong return continuation and dominate the factor momentum portfolio while the remaining factors do not. The factor momentum strategies do not outperform the corresponding long-only strategies in either sample. The choice of factors affects the ability of factor momentum to explain individual stock momentum.
We examine momentum profits from April 2014 to February 2020, dividing the aforementioned time span into two sub-periods; the Boom years spanning from 2014 to end of 2016, marked by high optimism and the slowdown years from 2017 till end of 2019 which were marred by sequentially deteriorating economic indicators. Momentum returns were tracked for the 110 odd largest companies by way of market cap and listed on the National Stock Exchange. During the Boom years, fifteen of the sixteen momentum strategies tested gave results that were both economically as well as statistically significant, thus confirming to the existing literature. However, the study also found five of the momentum strategies to still give results that significantly outperform the benchmark index during the subsequent period of economic decline and turmoil, thus providing some evidence supporting the persistence of momentum profits even during conditions when the macro environment might seem unfavorable.
We document problems in measuring raw and abnormal five-year contrarian portfolio returns. ‘Loser’ stocks are low-priced and exhibit skewed return distributions. Their 163% mean return is due largely to their lowest-price quartile position. A $-th price increase reduces the mean by 25%, highlighting their sensitivity to micro-structure/liquidity effects. Long positions in low-priced loser stocks occur disproportionately after bear markets and thus induce expected-return effects. A contrarian portfolio formed at June-end earns negative abnormal returns, in contrast with the December-end portfolio. This conclusion is not limited to a particular version of the CAPM.
This paper relates cross-sectional differences in returns on Japanese stocks to the underlying behavior of four variables: earnings yield, size, book to market ratio, and cash flow yield. Alternative statistical specifications and various estimation methods are applied to a comprehensive, high-quality data set that extends from 1971 to 1988. The sample includes both manufacturing and nonmanufacturing firms, companies from both sections of the Tokyo Stock Exchange, and also delisted securities. The authors' findings reveal a significant relationship between these variables and expected returns in the Japanese market. Of the four variables considered, the book to market ratio and cash flow yield have the most significant positive impact on expected returns. Copyright 1991 by American Finance Association.
Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the CAPM, they are called anomalies. We find that, except for the continuation of short-term returns, the anomalies largely disappear in a three-factor model. Our results are consistent with rational ICAPM or APT asset pricing, but we also consider irrational pricing and data problems as possible explanations.
Book-to-market ratio (BE/ME), market equity (ME), and one- year past return (momentum) (MOM) help explain the cross- section of expected individual stock returns within the U.S. and within other countries. Examining equity markets as a whole, in contrast to individual stocks, we uncover strong parallels between the explanatory power of these variables for individual stocks and for countries. First, country versions of BE/ME, ME, and MOM help explain the cross-section of expected country returns. Second, the January seasonal in ME's explanatory power for stocks also appears for countries. Third, portfolios formed by sorting stocks and countries on these variables produce similar patterns in profitability before and after the portfolio formation date.
Research on trading rule profitability usually simulates trading on historical data. These data usually are obtained from files such as CRSP, which estimate closing prices as the last trade (at the closing bid or the closing ask, or neither), or the bid-ask average (in the absence of a last trade). A trading rule could not normally be implemented at these prices, for even a smaller number of shares. A simulated contrarian strategy transforms noise in closing price estimates into return biases, by buying at predominantly bid prices and shorting at ask, which is not implementable for most investors. The bias in estimated contrarian portfolio returns is severe. For example, when returns are calculated from successive bid prices of NASDAQ stocks, short-term contrarian profits largely disappear
We explore the cross-sectional determinants of emerging equity market returns. We find that the behavior of emerging market returns differs substantially from the behavior of developed equity market returns and that these differences have persisted in the period ending June 1996. While there are some similarities between the cross-sectional determinants of emerging and developed market equity returns, emerging market strategies must take into account the special characteristics of these markets. In particular, the degree of integration of these markets with world equity markets has changed through time. This time-varying integration must be taken into account in asset allocation strategies. This is the final working paper version of a chapter we wrote for a book published in 1997.
Recent evidence reveals significant negative serial correlation in aggregate (market-wide) stock returns. We extend this result to relative (market-adjusted) returns, demonstrating negative serial correlation in five-year returns. We then test two competing explanations: (1) market mispricing and (2) changing expected returns in an efficient market. The tests are conducted using the capital asset pricing model to estimate relative returns. The evidence suggests that negative serial correlation in relative returns is due almost entirely to variation in relative risks, and therefore expected relative returns, through time. We document substantial relative risk shifts, particularly for extreme-performing stocks.
Recent research has found an abnormal return on the strategy of buying lo sers and selling winners in the stock market, a finding sometimes int erpreted as support for the market overreaction hypothesis. This arti cle explores an alternative interpretation of this evidence. The auth or finds that the risks of losers and winners are not constant. The e stimation of the return of this strategy is, therefore, sensitive to the methods used. When risk changes are controlled for, only small ab normal returns are found. The model of risk and return used in the pa per is the standard capital asset pricing model. Copyright 1988 by the University of Chicago.
Analyses of rational speculation usually presume that it dampens fluctuations caused by "noise" traders. This is not necessarily the case if noise traders follow positive-feedback strategies--buy when prices rise and sell when prices fall. It may pay to jump on the bandwagon and purchase ahead of noise demand. If rational speculators' early buying triggers positive-feedback trading, then an increase in the number of forward-looking speculators can increase volatility about fundamentals. This model is consistent with a number of empirical observations about the correlation of asset returns, the overreaction of prices to news, price bubbles, and expectations. Coauthors are Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann. Copyright 1990 by American Finance Association.
We examine the influence of industrial structure on the cross-sectional volatility and correlation structure of country index returns for 12 European countries between 1978 and 1992. We find that industrial structure explains very little of the cross-sectional difference in country return volatility, and that the low correlation between country indices is almost completely due to country-specific sources of return variation. Diversification across countries within an industry is a much more effective tool for risk reduction than industry diversification within a country.
Previous estimates of a 'size effect' based on daily returns data are biased. The use of quoted closing prices in computing returns on individual stocks imparts an upward bias. Returns computed for buy-and-hold portfolios largely avoid the bias induced by closing prices. Based on such buy-and-hold returns, the full-year size effect is half as large as previously reported, and all of the full-year effect is, on average, due to the month of January.
Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the capital asset pricing model, (CAPM), they are called anomalies. The authors find that, except for the continuation of short-term returns, the anomalies largely disappear in a three-factor model. Their results are consistent with rational intertemporal CAPM or arbitrage pricing theory asset pricing but the authors also consider irrational pricing and data problems as possible explanations. Copyright 1996 by American Finance Association.
In a previous paper, we found systematic price reversals for stocks that experience extreme long‐term gains or losses: Past losers significantly outperform past winners. We interpreted this finding as consistent with the behavioral hypothesis of investor overreaction. In this follow‐up paper, additional evidence is reported that supports the overreaction hypothesis and that is inconsistent with two alternative hypotheses based on firm size and differences in risk, as measured by CAPM‐betas. The seasonal pattern of returns is also examined. Excess returns in January are related to both short‐term and long‐term past performance, as well as to the previous year market return.
This article examines possible explanations for 'winner-loser reversals' in the national stock market indices of sixteen countries. There is no evidence that loser countries are riskier than winner countries either in terms of standard deviations, covariance with the world market or other risk factors, or performance in adverse economic states of the world. While there is evidence that small markets are subject to larger reversals than large markets, perhaps due to some form of market imperfection, the reversals are not only a small market phenomenon. The apparent anomaly of winner-loser reversals in national market indices therefore remains unresolved. Copyright 1997 by American Finance Association.
The authors show that the returns to the typical long-term contrarian strategy implemented in previous studies are upwardly biased because they are calculated by cumulating single-per iod (monthly) returns over long intervals. The cumulation process not on ly cumulates "true" returns but also the upward bias in single-period reutrns induced by measurement errors. The authors also show that the remaining "true" returns to loser or winner firms have no relation to overreaction. This study has important implicati ons for event studies that use cumulative returns to assess the impact o f information events. Copyright 1993 by American Finance Association.