Abstract
In this paper, we examine the presence of short-term and long-term momentum returns in Indian stock market. The study also tries to shed light on the power of asset pricing models and select macroeconomic variables in explaining momentum returns. The results confirm the presence of short-term and long-term momentum returns in Indian stock market. It is also found that Carhart four-factor model’s performance is relatively superior to other factor models such as one factor capital asset pricing model and Fama–French three-factor model in terms of capturing momentum returns. Finally, macroeconomic variables which are considered for analysis do not have any power to explain momentum returns.
Highlights
In financial research, it is an established fact that future stock returns can be predicted by stock price information
After forming portfolios for different trading strategies that are explained above, first we calculate mean excess return on each portfolio to check the availability of momentum returns in Indian stock market
If the mean returns on portfolios of any trading strategies are positive, it shows the availability of positive momentum returns in Indian stock market
Summary
It is an established fact that future stock returns can be predicted by stock price information. Investors can earn abnormal returns from stock market by using strategies based on prior returns. Two prominent trading strategies based on stocks’ past returns are used by large body of researchers, namely momentum and contrarian strategies. Contrarian strategy talks about price reversal which means past losers are future winners and past winners are future losers (see [8, 9]). That means shorting the past winners and holding past losers generates abnormal returns for investors if they rank and form portfolios of stocks based on their long-term (3–5 years) past returns. Momentum strategy is based on the hypothesis of price continuation which means past winners will remain future winners and past losers will continue to lose in future In the case of momentum strategy, investors need to sell past losers and buy past winners to earn
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