Unsystematic Risk Explanation to Momentum Profits in Taiwan

Abstract

This study investigates the momentum profits and provides a systematic risk as well as time-varying unsystematic risk explanation, adopting the monthly returns in the Taiwan stock market during 2003–2008 periods. Through the regression models including and combining the CAPM, Fama–French three factor model, GARCH(1,1)-M and TGARCH(1,1)-M, the main results are as follows. First, most of the momentum strategies have not significant positive returns. Next, CAPM as well as Fama and French factors could roughly explain momentum returns. Additionally, it may make some profits likely if the time-varying unsystematic risk is further considered in an investment strategy. Moreover, the return volatility for the portfolio of winners is more sensitive to recent news than the losers. Conversely, the return volatility of the loser is more sensitive to distant news and has a larger response to bad news than the winner. Finally, TGARCH-M related models usually perform better than GARCH-M ones; this infers the presence of leverage effect in Taiwan stock market.