Profitability of Momentum Strategies on the JSE

Abstract

This study evaluates the profitability of practical momentum strategies on the Johannesburg Stock Exchange (JSE) over the period January 1998 to May 2013 and compares the risk-adjusted return that could be achieved with the ALSI40. The study finds that, even after adjusting for risk and including transaction costs, momentum strategies provide abnormal annualised returns of up to 8.7% in excess of the benchmark. The effect of the portfolio start date is also evaluated and although there is some evidence of a calendar year effect, the momentum strategies continue to provide robust returns. Next, the study attempts to improve the return of momentum strategies by implementing a fixed stop-loss arrangement, without a meaningful improvement in returns. Finally, the momentum strategy is combined with other financial ratios, resulting in an improvement in annualised risk-adjusted returns of up to 14.1% in excess of the benchmark.