Underreaction, Trading Volume, and Momentum Profits in Taiwan Stock Market

Abstract

This paper uses a very short period to reexamine the momentum effect in Taiwan stock market, focusing on trading volume, size, and book-to-market factors. It is shown that price momentum exists in Taiwan stock market. In addition, trading volume predicts both the magnitude and the persistence of future price momentum. Specifically, the momentum strategy from buying past low-volume winners and selling past high-volume losers have better performance than the momentum strategy from buying past winners and selling past losers. Though Fama and French [27] three factors can partially explain the momentum profits, the momentum effect cannot be subsumed by the difference in risk factors. The profitability of the momentum strategy also cannot be completely explained as a reward for bearing the exposure to industry factors. The more prolonged accumulation of returns and lack of any observable return reversal support delayed reaction as a better explanation for the momentum returns. Besides, momentums in size and industry portfolios are as strong as individual stocks.