Abstract
This study examined momentum profitability in Australia, providing further evidence for intermediate-term momentum profitability. Using data spanning different market states, we found that momentum was stronger after the global financial crisis. We also examined industry-level momentum strategies and found strong evidence for industry momentum. Specifically, industries that perform well relative to other industries continue to outperform others while those that underperform continue to perform poorly. This finding suggests the exploitability of return continuation and profit-making opportunities for traders at the industry level. Regarding liquidity, we found that it has no clear predictive power for momentum returns. Hence, our results do not appear to support the conjecture that liquidity can be a determining factor for momentum profitability in Australia.
Highlights
A momentum trading strategy is a technical analysis tool frequently used by practitioners
The present study of momentum profitability may be considered a relevant extension to complex decision processes since we examine momentum profitability under different criteria—namely, industry differences and the liquidity characteristics of stocks
Our results show that the momentum strategy in Australia was somewhat similar to that in other developed markets in terms of economic profitability, evidenced by the returns generated by J3K3 (8.5% per annum), which fell within the range of 9%–18% per year in the US and other developed markets
Summary
A momentum trading strategy is a technical analysis tool frequently used by practitioners. Traders simultaneously consider long stocks that have outperformed in the recent past and short stocks that have underperformed. The belief is that stock price movement will continue in the same direction over the short term to the medium term. The first paper to formally document momentum evidence was Jegadeesh and Titman (1993). They found that buying winning stocks and selling losing stocks in the US market could generate an annualized return of 12.01%. Much work has been done since on the effect of momentum in the US and other markets. Prior work has shown that the momentum effect is predominantly positive and significant in developed markets such as in the US and Europe while the effect is more elusive in others, especially in emerging markets
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