Testing International Momentum Strategies between Chinese and Australian Financial Markets

Santosh Abraham

doi:10.2139/ssrn.2285303

Abstract

This paper tests international momentum effects between Chinese Shanghai Composite Index and Australian resource stocks. If markets were efficient, there would be no profits from momentum strategies. Two momentum strategies are examined; index tracking and enhanced indexing. The enhanced indexing strategy is more profitable than the index tracking strategy, although the index tracking strategy had a higher Sharpe Ratio. Small capitalised stocks exhibit strong momentum effects. Using a newly developed partial adjustment model, support is provided for Chan et al (1996) who demonstrate that under-reaction to economic news explains momentum profits and Rouwenhorst (1998) who finds evidence of momentum effects in emerging countries.

Highlights

This paper examines the profitability of momentum strategies formed based on past returns of Australian resource stocks and the Chinese CSC index
All Australian resource stocks in the sample were non-stationary in levels and stationary in first differences
The findings were that both index tracking and enhanced indexing strategies were profitable

Summary

Introduction

Momentum strategies involve buying past winners and selling past losing stocks. Jegadeesh and Titman (1993) find that over six-month period a momentum strategy in NYSE/AMEX stock exchanges earns approximately one per cent per month. Rouwenhorst (1998) studied a sample of 12 European countries over the period from 1980 to 1995 and found similar results to those of Jegadeesh and Titman (1993). Rouwenhorst (1997) studied a sample of 20 emerging markets and found momentum effects led to abnormal profits (Hong et al, 2000).There is a gap in the literature in that whilst international momentum effects have been studied by Rouwenhorst (1998) and others, there has been no research conducted on international momentum effects that involve the joint indexing strategies between and index in one country and stocks in another country. Jegadeesh and Titman (1993) find that over six-month period a momentum strategy in NYSE/AMEX stock exchanges earns approximately one per cent per month. Rouwenhorst (1998) studied a sample of 12 European countries over the period from 1980 to 1995 and found similar results to those of Jegadeesh and Titman (1993). There is a gap in the literature in that whilst international momentum effects have been studied by Rouwenhorst (1998) and others, there has been no research conducted on international momentum effects that involve the joint indexing strategies between and index in one country and stocks in another country. China's demand for Australian resources and energy exports has resulted in a trade surplus for Australia.

Methods

Results

Discussion

Conclusion