Profitability of Volume-based Momentum and Contrarian Strategies in the Indian Stock Market

Abstract

This article investigates the relationship of trading volume with the profitability of momentum and long-run contrarian strategies for the Indian stock market. The result of the study provides support to Lee and Swaminathan (2000, The Journal of Finance, 55(5), 2017–2069) argument that trading volume predicts both the magnitude as well as the persistence of momentum in the long run. The portfolio of heavily traded securities earned higher momentum and contrarian returns as compared to low-trading securities portfolio in the Indian stock market. Hence, returns from both momentum and contrarian portfolios are positively related to the level of trading activity in the security. Further, the results provide evidence in favour of volume-based investment strategies. Both volume-based momentum strategy and volume-based contrarian strategy generate higher return in the Indian stock market as compared to pure momentum and contrarian strategy. In addition, the study provides support to momentum life cycle theory in explaining the relation between trading volume and momentum returns in the Indian stock market. These findings cast strong implication for Indian investors who are continuously engaged in identifying profitable investment strategies that can generate higher returns.