Price Momentum in the New Zealand Stock Market: A Proper Accounting for Transactions Costs and Risk

Abstract

We test for recently reported momentum profits in New Zealand using a practitioner technique that we have not yet seen in the academic literature. This technique simultaneously weighs returns, risk, and transactions costs at each portfolio rebalance, rather than blindly chasing returns and then accounting for risk and transactions costs after the fact. We reverse the findings of the earlier literature because our gross profits are more than fully consumed by transactions costs. Although we focus on momentum trading in New Zealand, our practitioner technique is broadly applicable to investigations of trading anomalies. We are the first to use properly bench marked and value-weighted portfolios, actual bid-ask spreads, a practitioner model of price impact, and an explicit decomposition and attribution of New Zealand momentum returns to industry and/or stock-specific sources. We find stock-specific factors dominate industry factors, and small stocks and winner stocks are better sources of momentum alpha than large stocks and loser stocks, respectively.