Abstract
1. Introduction Recent decade proved to be one of the most problematic periods for asset managers since great depression. Global economy suffered two recessions where the recent one, which started in 2008, due to it's large impact to global markets is often being pronounced as the Great recession. As a result almost all main financial markets felt abnormal turbulence which suddenly led to negative portfolio returns for absolute majority of investors. The Capital Asset Pricing Model (CAPM) explains security prices by assuming rational behaviour on the part of investors (Sharpe 1964). Components of this behaviour, like mean-variance optimization, suggest investors must be able to solve complicated equations to construct optimal portfolios (Bodie et al. 2008). However, there are many articles with arguments that this concept is fragile (Michaud 1989; Farrelly 2006). As correlations during the peak of high economic uncertainty between main asset classes brake down (Taleb 2007; Campbell et al. 2002), rational behaviour is replaced by panic so even supposed to be well-diversified (rational) investors are experiencing huge losses in their investment portfolios (Dalbar 2010; Coaker 2007; Kindleberger and Aliber, 2005; Lowenstein 2001; Shiller 1984). On the other hand As Vanguard's study (2011) shows, investors' behaviour during up-trending market conditions are noticeably irrational. Data from net cash flows to bond and equity mutual funds reveals that investors in market peaks tend to allocate significantly larger amounts of cash to equity funds than they do in down-trending markets. Thalassinos, Maditinos and Paschalidis (2012) have concluded for the existence of strong evidence in insider trading in the ASE. As a matter of fact, just before the recent recession in 2008 net flow of cash to US equity funds during 2006-2007 reached 464 billion USD while in the bottom of dot.com bubble burst in 2001 and 2002 cash flow to equity funds was only 107 billion USD. Same tendency repeated in 2009 where cash flow was even negative. This indicates that instead of being rational and willing to buy stocks at significantly lower valuations like seen in 2001/2002 or 2009, majority investors decide to invest more aggressively near the peaks where valuations are much less attractive. We can conclude that majority of market participants in one way or another could be influenced by recent past market performance. Such irrationality can be explained by behavioural aspects where greed is one of the main driving factors (Shiller 2005). Thus if we assume that systematic irrationality in the financial markets is one of the main factors that stimulate widening the scale of boom-bust cycles it is natural to look for such asset management methods in areas related to behavioural finance. Investment community almost unanimously agree that diversification is one of the main factors influencing final portfolio results (Bernstein 2010; Faber and Richardson, 2009; Darst 2007; Gibson 2007; Gibson 2007; Fraser-Sampson 2006; Bogle 2001; Jacquier and Marcus, 2001; Ibbotson et al. 2000) thus it is interesting to look for such investment management strategies that could not only potentially add value in one particular asset class but ideally generate synergetic effects using all main asset classes. One potential candidate concept for this task is the called momentum phenomena, where fundamental factors are completely ignored, and only combinations of past performance are used. In our case there will be an effort to evaluate if simply analyzing past 1, 3, 6, 9, 12 months rates of change we can achieve better compounded annual growth rates with overall better risk/return ratios than simply buying and holding all main asset classes in equal-proportion passive portfolio. 2. Literature Review on Momentum Investing Growing stock market and rising activity of investors attracts more increasing attention by retail traders who look for simple investing methods (Dudzeviciute, 2004). …
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have