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Article
Publication date: 21 September 2015

Sanjay Sehgal and Kanu Jain

Momentum is an unresolved puzzle for the financial economists. The purpose of this paper is to dissect the sources of momentum profits and investigate the possible role…

Abstract

Purpose

Momentum is an unresolved puzzle for the financial economists. The purpose of this paper is to dissect the sources of momentum profits and investigate the possible role played by the macro-economic variables in explaining them.

Design/methodology/approach

The data for 493 companies that form part of Bombay Stock Exchange 500 index in India is used for calculating 6-6 momentum profits. Profits from the strategy are regressed on Capital Asset Pricing Model (CAPM) and Fama-French (FF) model to see whether they can explain these profits. Guided by prior research, three methodologies are used to see the possible role played by macro-economic variables in explaining momentum payoffs.

Findings

The empirical results show that momentum profits are persistent in the intermediate horizon. CAPM and FF three-factor model fail to explain these returns. Price momentum seems to be explained in one of the model by lagged macro-economic variables which lend an economic foundation to the Carhart factor. The “Winner minus Loser” factor explains about 37 percent of abnormal returns on the winner portfolio that are missed by the FF model. The unexplained momentum profits seem to be an outcome of investors’ over-reaction to past information. Hence, the sources of price momentum profits seem to be partially behavioral and partially rational.

Practical implications

The failure of risk models in fully explaining the momentum profits may be good news for portfolio managers who are looking out for stock market arbitrage opportunities.

Originality/value

This paper fulfills an identified need to study the sources behind price momentum profits in Indian context.

Details

International Journal of Emerging Markets, vol. 10 no. 4
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 3 July 2007

Ron Bird and Lorenzo Casavecchia

The purpose of this research is to study the extent to which various price and earnings momentum measures can be used to enhance portfolio performance by better timing…

Abstract

Purpose

The purpose of this research is to study the extent to which various price and earnings momentum measures can be used to enhance portfolio performance by better timing entry into value stocks (and isolating those growth stocks that still have some period to run).

Design/methodology/approach

The paper uses the traditional methodology of ranking stocks on the basis of certain value and momentum measures (e.g. book‐to‐market, market return over some prior period), forming portfolios based on these rankings which are held for a specific period of time. The portfolios are formed on the basis of a single measure of multiple measures and the returns and associated p‐values are calculated with the objective of determining how these portfolios perform relative to a benchmark portfolio composed of all the companies in the universe. The analysis is conducted on a database consisting of approximately 8,000 companies drawn from 15 European countries over the period from January 1989 to May 2004.

Findings

It was found that a number of individual, and combinations of, price and earnings momentum factors are able to enhance value portfolios by identifying stocks that will not perform well in the immediate future. The best measure that was found for timing entry into value and growth stocks is a combination of price momentum and price acceleration where the difference in monthly performance between the “best” and “worst” value (growth) portfolios is 2.6 percent (2.4 percent) for holding periods of 12 months. It was found not only that this momentum measure can be used to enhance value and growth in portfolios consisting of all European stocks but also that it can be successfully deployed in the major individual markets and regions.

Originality/value

Most studies that evaluate the performance of value and growth portfolios do not consider the characteristics of the stocks held in these portfolios. However, it is these characteristics that determine the success of the portfolios formed on the basis of what can only be described as very crude valuation multiples. This paper demonstrates the potential of a closer evaluation of the stocks chosen to be included in a particular portfolio by being able to identify those stocks most likely to perform (and under‐perform). The findings in the paper have obvious implications for the investment processes of investment managers but they also provide useful insights into the efficiency of the European markets and the typical means of price formation within those markets.

Details

International Journal of Managerial Finance, vol. 3 no. 3
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 11 November 2020

Irfan Safdar

What explains patterns in stock prices is an important question. One such pattern, price momentum, is a well-known capital markets anomaly where recent stock price

Abstract

Purpose

What explains patterns in stock prices is an important question. One such pattern, price momentum, is a well-known capital markets anomaly where recent stock price performance appears to continue into the future. This momentum is frequently thought to reflect delayed reaction by investors to unspecified information (i.e. underreaction). This study aims to provide a useful insight regarding momentum: potential mispricing related to accounting fundamentals appears to conceal longer-term reversals in price momentum. Controlling for these fundamentals reveals that price momentum reverses, indicating that investor overreaction is a potentially important source of stock price momentum. The evidence presented in this study emphasizes the importance of decoupling momentum and accounting fundamentals to achieve a more complete understanding of what explains stock price momentum.

Design/methodology/approach

This study explores this question by examining the longer-term performance of momentum stocks in the US market after decoupling it from performance related to accounting fundamentals using returns to fundamentals-based factors as controls in time series regressions.

Findings

This study finds evidence of clear reversals in the remaining price momentum. These reversals provide a new insight into the momentum effect because they imply that the component of price momentum not traceable to accounting fundamentals reflects investor overreaction rather than underreaction.

Originality/value

The findings indicate that the underlying nature of the information driving price movements is important to achieving a complete understanding of what explains price momentum. To the best of the author’s knowledge, no other study has examined the behavior of stock price momentum while controlling for accounting fundamentals.

Details

Pacific Accounting Review, vol. 32 no. 4
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 17 June 2020

Susana Yu and Gwendolyn Webb

We extend empirical evidence on the profitability of momentum trading to the realm of plain-equity ETFs.

Abstract

Purpose

We extend empirical evidence on the profitability of momentum trading to the realm of plain-equity ETFs.

Design/methodology/approach

We employ several ranking measures used in prior research, and for each we apply a traditional ranking based on total return, and a variation based only on the capital gain/loss portion of return.

Findings

While we find that past momentum is not a strong predictor of future performance in our overall sample period, 2007 to June 2018, we find that the percent off 52-week high price results in positive performance in the recovery years following the financial crisis of 2008–2009.

Research limitations/implications

Our study is limited by the availability of ETF experience and data, and our test period covers just 2007 through June 2018. This period includes the financial crisis of 2008–2009, which previous research finding is associated with the momentum strategy's loss of profitability. When we exclude that period, we find evidence of a profitable momentum strategy based on the measure of percent off 52-week high price, enabling us to reject the null hypothesis that the momentum trading strategy is no longer profitable.

Practical implications

It is profitable based on both return measures used in the rankings. Our finding of a profitable momentum trading strategy suggests that the null hypothesis that the momentum strategy is no longer profitable can be rejected.

Originality/value

While perhaps not so strong as to reject the efficient markets hypothesis fully, our empirical findings are more consistent with a behavioral explanation and a market inefficiency. In view of the relative ease and low transactional costs of trading in ETFs, the markets have yet another opportunity to recognize an apparent mispricing and employ arbitrage based on it. To the extent that the relative ease of trading in ETFs makes momentum strategies easier to employ, the momentum anomaly might still be expected to disappear in an efficient market.

Details

Managerial Finance, vol. 46 no. 11
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 October 2019

Jang Hyung Cho, Robert Daigler, YoungHa Ki and Janis Zaima

The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets.

Abstract

Purpose

The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets.

Design/methodology/approach

The Grinblatt et al.'s (1995) measure of momentum strategy is used to estimate the degree momentum and contrarian strategies. Then, regression analysis is used to determine the effects of trading strategies on volatility.

Findings

Up until 2005, the trades by non-clearing member firms in the futures market were separated from institutional traders providing us the opportunity to study trading strategies adopted by large distinct trading groups and its effects on volatility in the futures markets. It is found that individual traders use momentum strategy, whereas market makers and institutional traders use contrarian strategy. Momentum strategy adopted by individual traders increases volatility whereas contrarian strategy dampens volatility. Moreover, it is found that institutional traders engage more actively in contrarian trading when individual traders cause excessive volatility. The two distinct trading groups were separately tracked prior to 2005 giving us a unique window to determine the effect of the traders that conduct momentum trading as opposed to the ones that are contrarian traders. After the reclassification, the institutional trading group exhibited weaker contrarian strategy which can be attributed to the inclusion of non-clearing firm traders.

Originality/value

This study documents the first empirical evidence that shows off-exchange futures trader group is not composed of only pure noise makers, but there are short-term forecasters in its group. The authors also show a unique finding that noises caused by off-exchange group is from momentum strategy that they use, whereas contrarian strategy is used by institutional trader lower volatility.

Details

Review of Accounting and Finance, vol. 19 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 2 November 2015

Sanjay Sehgal and Vibhuti Vasishth

– The purpose of this paper is to evaluate the profitability of investment strategies based on past price changes and trading volumes.

Abstract

Purpose

The purpose of this paper is to evaluate the profitability of investment strategies based on past price changes and trading volumes.

Design/methodology/approach

Data are employed from January 1998 to December 2011 for select emerging markets. Portfolios are formed on the basis of past information on prices and/or volumes. Unrestricted and risk adjusted returns for sample portfolios are analyzed. The risk models employed in study are Capital Asset Pricing Model (CAPM), Fama-French (F-F) Model and Fama-French augmented models.

Findings

Price momentum patterns are observed for Brazil, India, South Africa and South Korea, while there are reversals in Indonesia and China. Low-volume stocks outperform high-volume stocks for all sample countries except China. Further, volume and price based bivariate strategies do a better job than univariate strategies in case of India, South Africa and South Korea. The past price and volume patterns in stock returns are not fully explained by CAPM as well as the F-F Model. Price and volume momentum factors do play a role in explaining some of these return patterns. Finally, the unexplained returns seem to be an outcome of investor under or overreaction to past information. The sources of price and volume momentum seem to be partly risk based and partly behavioral.

Originality/value

The study analyzes combined role of price and volume in portfolio formation with post holding analysis. The work is useful for global portfolio managers, policy makers, market regulators and the academic community. The study contributes to asset pricing and behavioral finance literature for emerging markets.

Details

Journal of Advances in Management Research, vol. 12 no. 3
Type: Research Article
ISSN: 0972-7981

Keywords

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Book part
Publication date: 11 August 2016

Knut F. Lindaas and Prodosh Simlai

We examine the incremental cross-sectional role of several common risk factors related to size, book-to-market, and momentum in size-and-momentum-sorted portfolios. Unlike…

Abstract

We examine the incremental cross-sectional role of several common risk factors related to size, book-to-market, and momentum in size-and-momentum-sorted portfolios. Unlike the existing literature, which focuses on the conditional mean specification only, we evaluate the common risk factors’ incremental explanatory power in the cross-sectional characterization of both average return and conditional volatility. We also investigate the role of ex-ante market risk in the cross-section. The empirical results demonstrate that the size-and-momentum-based risk factors explain a significant portion of the cross-sectional average returns and cross-sectional conditional volatility of the benchmark equity portfolios. We find that the Fama–French (1993) factors and the ex-ante market risk are priced in the cross-sectional conditional volatility. We conclude that the size-and-momentum-based factors provide a source of risk that is independent of the Fama–French factors as well as ex-post and ex-ante market risk. Our results bolster the risk-based explanation of the size and momentum effects.

Details

The Spread of Financial Sophistication through Emerging Markets Worldwide
Type: Book
ISBN: 978-1-78635-155-5

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Article
Publication date: 29 July 2014

Sanjay Sehgal and Sakshi Jain

– The purpose of this paper is to analyze long-term prior return patterns in stock returns for India.

Abstract

Purpose

The purpose of this paper is to analyze long-term prior return patterns in stock returns for India.

Design/methodology/approach

The methodology involves portfolio generation based on company characteristics and long-term prior return (24-60 months). The characteristic sorted portfolios are then regressed on risk factors using one factor (capital asset pricing model (CAPM)) and multi-factor model (Fama-French (FF) model and four factor model involving three FF factors and an additional sectoral momentum factor).

Findings

After controlling for short-term momentum (up to 12 months) as documented by Sehgal and Jain (2011), the authors observe that weak reversals emerge for the sample stocks. The risk model CAPM fails to account for these long-run prior return patterns. FF three-factor model is able to explain long-term prior return patterns in stock returns with the exception of 36-12-12 strategy. The value factor plays an important role while the size factor does not explain cross-section of average returns. Momentum patterns exist in long-term sector returns, which are stronger for long-term portfolio formation periods. Further, the authors construct sector factor and observe that prior returns patterns in stock returns are partially absorbed by this factor.

Research limitations/implications

The findings are relevant for investment analysts and portfolio managers who are continuously tracking global markets, including India, in pursuit of extra normal returns.

Originality/value

The study contributes to the asset pricing and behavioral literature from emerging markets.

Details

Journal of Advances in Management Research, vol. 11 no. 2
Type: Research Article
ISSN: 0972-7981

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Article
Publication date: 3 October 2016

George Li

This paper aims to examine the impact of the dividend payout ratio on future stock returns and momentum strategies.

Abstract

Purpose

This paper aims to examine the impact of the dividend payout ratio on future stock returns and momentum strategies.

Design/methodology/approach

The author uses the portfolio sorting approach used in the momentum literature to examine this impact.

Findings

First, the author shows that the returns for the winner stocks tend to be the largest if no dividends are paid and then decrease with the dividend payout ratio; the returns for the loser stocks tend to have an inverted U-shaped relationship with the dividend payout ratio, but the zero-dividend loser stocks have the smallest return; and the returns for the stocks between the winners and the losers tend to remain similar, regardless of the dividend payout ratio. Second, the author shows that momentum profit is the largest for the stocks that do not make dividend payment but appear similar for the stocks that pay dividends. The author's empirical findings imply that stock price momentum is a function of the dividend payout ratio, growth stock momentum tends to be much stronger than value stock momentum and no-dividend stock momentum beats dividend stock momentum. In fact, when the dividend payout ratio is considered, momentum profit can be improved by up to 63 per cent.

Originality/value

This paper is the first one to examine the impact of dividend payout ratios on future stock returns and momentum profit, and it obtained many interesting empirical results. In addition, unlike most studies in the momentum literature that use behavioral theory to explain empirical findings, this paper uses the growth option idea to present a rational explanation for the empirical results in this paper.

Details

Studies in Economics and Finance, vol. 33 no. 4
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 27 June 2018

Ajay Bhootra

The purpose of this paper is to examine the combined performance of momentum and a gross profitability-based strategy. The motivation stems from the strong performance of…

Abstract

Purpose

The purpose of this paper is to examine the combined performance of momentum and a gross profitability-based strategy. The motivation stems from the strong performance of momentum on the short side and profitability on the long side, suggesting a potentially superior combined strategy. Gross profitability is also a measure of firm quality, so that another motivation is to contribute to a growing literature on factor-based investing that includes momentum and quality as potential factors.

Design/methodology/approach

The empirical approach employed in the paper is standard in the asset pricing literature. The firms are sorted into portfolios based on profitability and momentum, and the combined performance is studied through independent double sorting. Both value-weighted and equally weighted returns are reported in case of key empirical results.

Findings

The combined strategy results in superior performance. Specifically, the strategy produces results 2.75 greater than the momentum strategy, and about four times as high as the profitability strategy. The strategy also has much higher Sharpe ratio that improves further when combined with size and value strategies.

Research limitations/implications

The research has significant implications for academics and practitioners alike. A new investment strategy that has not been explored in the literature is presented. The superior performance of the strategy presents a challenge for the market efficiency, and would be of interest to academics and practitioners working in the area of investment management.

Practical implications

There has been a growing interest in multi-factor investing in recent years. The paper documents that superior performance is achieved by combining two of the popular factors, namely profitability and momentum.

Originality/value

The research is the first to study the combined performance of profitability and momentum, and provide evidence on the superiority of the combined strategy.

Details

Managerial Finance, vol. 44 no. 8
Type: Research Article
ISSN: 0307-4358

Keywords

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