Abstract
The authors investigate the effect of a short-term stock return reversal on the term structure of momentum profits in the Korean stock market following Goyal and Wahal (2015). Their empirical findings show that the term structure of momentum is more pronounced when a return reversal lasts up to two months but is substantially weakened when past performance over the last two months is not taken into account for portfolio formation. Their evidence suggests that the term structure of momentum profitability arises primarily from a carryover of the return reversal from the previous two months.
Highlights
This study examines the term structure of momentum profits reported by Novy-Marx (2012) in the Korean stock market
The pret(p,q) strategy refers to the momentum strategy constructed each month by buying winners and selling losers, which are defined as the top and bottom quintiles of cumulative returns over months t–p to t–q
Previous studies demonstrate the existence of the term structure of momentum returns, which means that momentum profits are driven by returns over the intermediate rather than recent horizon (Novy-Marx, 2012)
Summary
This study examines the term structure of momentum profits reported by Novy-Marx (2012) in the Korean stock market. Jegadeesh and Titman (1993, JT hereafter) find that past returns can predict future returns: the strategy of buying past winners and selling past losers generates significantly positive profits. This study examines the term structure of momentum profits reported by Novy-Marx (2012) in the Korean stock market. We provide a convincing explanation for the term structure of the momentum and echo effects in the Korean stock market This is primarily driven by a return reversal occurring over two months. 3. Term structure of momentum profits Table 2 shows the average monthly returns for the long-short portfolios for the momentum strategy based on different past performances [6]. We find that the conventional momentum strategy, based on pret(12,2), does not generate positive returns, consistent with previous studies finding no price momentum in the Korean stock market (Chung and Kim, 2002; Ahn and Lee, 2004; Park and Jee, 2006; Chui et al., 2010). We find that the illiquidity effect (Amihud, 2002) and profitability effect (Novy-Marx, 2012; Fama and French, 2015) are insignificant in the Korean market unlike in the US market
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