Momentum, reversals and liquidity: Indian evidence

Abstract

This paper addresses three interesting questions. First, we explore whether price momentum exists for equities listed on the Bombay Stock Exchange (BSE). Second, whether liquidity (measured by turnover ratio) enhances the momentum effect. Third, whether momentum profits exhibit reversals for illiquid stocks. Using a large sample of 3956 stocks for the period 2000 to 2021, we establish three key results. First, we find evidence of significant price momentum (intermediate and long-term) for equities listed on the BSE. Second, when conditioned on liquidity, we find that the momentum returns (short, intermediate, and long-term) are more significant for the most liquid portfolio and exhibit persistence for the next 12 months. Third, although we document evidence of short and intermediate-term reversals among the most illiquid portfolios, we fail to find evidence of persistence. Our results continue to hold after controlling for risk factors related to market premium, firm size, value, and a host of macroeconomic indicators. Taken together, our paper highlights the role of liquidity in amplifying the momentum effect in the Indian market.