Establishment of Portfolio Based On Momentum Strategy and Analyzing the Factors Affecting the Portfolio Returns

Abstract

For many years, momentum strategy for investment in stocks is being investigated, which suggests that investing in the stocks in momentum generally generates excessive returns. The study explores establishing the portfolio based on the momentum strategy adopting the methodology of Jegadeesh and Titman with minor modification. Building on Indian data from the National Stock Exchange, stocks of Index Nifty 50, and Next Nifty from January 2010 to December 2019, this paper analyzes the return to see the effectiveness of momentum strategy. The stocks in the portfolio are included based on defined criteria like change in stock price and moving average. The portfolio returns are further decomposed to find the rationale behind the momentum returns. Using Auto Vector Regression in R, portfolio returns are regressed against macro-economic variables like Net Foreign Direct Investment, inflation, gold price, and money supply to see the impact of these variables on the portfolio returns generated using the momentum strategy. The study provides insight for analyzing the portfolio based on the concept of momentum.