Momentum-based Trading Strategies Research Articles

Investor heterogeneity and momentum-based trading strategies in China

The conventional momentum strategy performs poorly overall in China, because stock prices behave very differently when markets are open for trading versus when they are closed. Stocks that are past intraday (overnight) winners persistently outperform those that are past intraday (overnight) losers in the subsequent intraday (overnight) periods. However, the same intraday- (overnight-) momentum strategy suffers dramatically in the subsequent overnight (intraday) periods. Further analysis shows that past intraday (overnight) winners tend to be more (less) speculative stocks which are highly demanded during the day (night). Overall, our results are consistent with investor heterogeneity, and this persistent tug of war virtually eliminates the effectiveness of investors pursuing the momentum-based trading strategy in China.

Does the Adaptive Market Hypothesis explain the evolution of emerging markets efficiency? Evidence from the Moroccan financial market

This paper scrutinizes different aspects of the Adaptive Market Hypothesis (AMH) in the Moroccan financial market over the period from January 1992 to September 2019 through different approaches. On the basis of daily returns on MASI index, we measure the evolution of efficiency degree based on the linear and nonlinear tests with rolling window. One of the practical implications of the AMH is that the profit opportunities arise from time to time depending on the degree of market efficiency and according to market conditions. To investigate this implication, we track the evolving performance of momentum-based trading strategies and the extent to which this performance is related to the market efficiency degree and certain market conditions. The linear and nonlinear tests reveal that the efficiency degree is time-varying. Moreover, we find via momentum test that profit opportunities appear from time to time and disappear once they are exploited. Interestingly, the momentum profits depend on both the degree of market efficiency and some market conditions. Thus, the investors can capitalize on the inefficiency and certain market conditions using trading strategies such momentum. Overall, our findings are consistent with the AMH framework, which is proved to be a better explanation of the behavior of emerging markets than the Efficiency Market Hypothesis (EMH).

Investor Heterogeneity and Momentum-based Trading Strategies in China

The conventional momentum strategy performs poorly overall in China, because stock prices behave very differently when markets are open for trading versus when they are closed. Stocks that are past intraday (overnight) winners persistently outperform those that are past intraday (overnight) losers in the subsequent intraday (overnight) periods. However, the same intraday- (overnight-) momentum strategy suffers dramatically in the subsequent overnight (intraday) periods. Further analysis shows that past intraday (overnight) winners tend to be more (less) speculative stocks which are highly demanded during the day (night). Overall, our results are consistent with investor heterogeneity, and this persistent tug of war virtually eliminate the effectiveness of investors pursuing the momentum-based trading strategy in China.

A critique of momentum strategies

Given the key role of momentum-based trading strategies in active investing, assessing the merits of various trading strategies based on momentum should be of value to investors and managers alike. We summarise five momentum-based trading strategies which are well analysed in the academic literature, and introduce our new strategy named partial moment momentum (PMM) which distinguishes between upside and downside risks in the calculation of positions. Some empirical analyses suggest PMM outperforms the existing strategies.

Is Exchange Rate Trading Profitable?

We test whether exchange rate trading is profitable in the emerging markets of Brazil, China, India, and South Africa. Using momentum trading strategies applied to high frequency data, we discover that: (a) momentum-based trading strategies lead to statistically significant profits from the currencies of all four emerging markets; (b) the South African Rand is generally the most profitable, followed by the Brazilian Real and the Indian Rupee; (c) profits are persistent during the day and are trading frequency dependent; and (d) during the period of the global financial crisis currency profits were maximised.

Momentum, sovereign credit ratings and global equity markets

This article investigates the link between momentum-based trading strategies implemented in global equity markets and country-specific credit ratings. The findings indicate that only the momentum strategy based on intermediate past returns generate statistically significant profits. Notably, the winner portfolios exhibit a higher average credit rating than the other portfolio groups. Surprisingly, neither global asset pricing models nor a conducted world credit risk factor can explain these profits.

Momentum in global equity markets in times of troubles: Does the economic state matter?

This paper investigates the profitability of momentum-based trading strategies pursued during the most recent economic downturns in global equity markets. In contrast to previous studies, it reveals that such strategies generated statistically significant negative returns during the most recent recessions. These “momentum crashes” happen during market reversals following exceptionally large market declines, as occurred in March and April 2009.

Is the European Union Emissions Trading Scheme (EU ETS) informationally efficient? Evidence from momentum-based trading strategies

Since 2005, the European Union Emissions Trading Scheme (EU ETS) has seen a rapid growth in trading volume activity, with 1.44 billion tons of CO2 traded in 2007. The total value of these trading transactions was €24.1 billion in 2007, confirming the EU ETS as the largest emissions trading system by transaction value. In this paper, we test whether this market exhibits predictability of prices in terms of momentum (i.e., positive/negative changes continuing) and overreaction (i.e., positive/negative changes reversing). We test whether momentum and overreaction exist in the carbon price, and if they do, whether they result in profitable trading strategies. We document a robust short-term momentum and medium-term overreaction within the EU ETS. We also find statistically significant returns in a number of strategies tested. The strategies employed provide excess returns that remain achievable in a practical sense even after transaction costs have been taken into consideration. Our results therefore provide evidence that the EU ETS is not informationally efficient.

Do momentum-based trading strategies work in emerging currency markets?

We appear to be the first to present correctly calculated results for the profitability of emerging currency momentum strategies using a long time series and a good cross-sectional sample. Using a 1985–2009 sample period and six emerging currencies, we find that long-short momentum strategies gained about 1–3% per annum after actual transaction costs. These profits declined through time (both economically and statistically), however, with most of our strategies losing money after transaction costs during the last five years of our sample. These results are similar to, though slightly more volatile in the cross section, than those published for major currencies.

The Profitability of Momentum Trading Strategies in the Irish Equity Market

We examine the profitability of momentum-based trading strategies in the Irish equity market between 1988 and 2007. We investigate a range of trading strategies over alternative backward-looking ranking periods and forward-looking holding horizons as well as for alternative size momentum portfolios. We find that returns to momentum-based strategies are highly non-normally distributed, giving rise to concern about the validity ofinferences based on standard statistical tests of their abnormal performance. We therefore apply a bootstrap procedure to construct nonparametric p-values for the portfolio performance measures. Overall, we find little evidence that momentum-based trading strategies would have yielded an abnormal risk-adjusted return over the period. The Irish equity market appears to be quite efficient in this respect.

The 52-week high, momentum, and predicting mutual fund returns

George and Hwang (J Finance 59:2145–2176, 2004) have shown that the 52-week high share price carries significant predictive ability for individual stock returns, dominating other common momentum-based trading strategies. Based upon their results and other methods, this paper examines and compares the performance of three momentum trading strategies for mutual funds, including an analogous 1-year high measure for the net asset value of mutual fund shares. Strategies based on prior extreme returns and on fund exposure to stock return momentum are also examined. Results show that all three measures have significant, independent, predictive ability for fund returns. Further, each produces a distinctive pattern in momentum profits, whether measured in raw or risk-adjusted returns, with profits from momentum loading being the least transitory. Nearness to the 1-year high and recent extreme returns are significant predictors of fund monthly cash flows, whereas fund momentum loading is not.

Empirical Tests on Turnover Information

The objective of this study is to investigate turnover information and to test whether this information affects asset returnｓ. We explore the relationship between turnover and price momentum (reversalｓ) for Japanese stocks. In the Japanese stock market, the return reversal effect is known to be stronger than in other developed capital markets and most preceding studies show that price momentum cannot be found in the Japanese stock market. In this study, we investigate the relationship between price momentum and turnover, particularly, conditional upon the level of turnover; we find that high turnover tends to induce momentum in short-term periods. The study also investigates whether the coskewness premium affects price momentum effects, like the findings in previous studies of U.S. data, which demonstrated that coskewness helps explain some of the profitability of momentum-based trading strategies. Our results show that the coskewness of past losers is larger than that of past winners. This indicates that negative coskewness stock has a coskewness premium and that investors require a premium for negative coskewness stocks. Furthermore, the coskewness premium helps enhance price momentum as the turnover level increases and depresses return reversal effects for the highest turnover stock group.

Short-Term Momentum Patterns in Stock and Sectoral Return: Evidence from India

Momentum strategies have drawn great attention in investment management literature over last two decades. In this paper we examine three important propositions in Indian context (1) Do momentum profits persist for long time periods?, (2) Can these momentum profits be absorbed by risk models?, and (3) Is stock momentum an outcome of sectoral momentum?.We develop 6-6 and 12-12 investment strategies based on past returns as well as company characteristics. We find momentum profits in Indian context for our prior return portfolios which are stronger for 6-6 compared to 12-12 strategies. These momentum profits are larger for some characteristic sorted portfolios. Risk models such as CAPM and Fama French model significantly fail to capture momentum profits. In fact, winner portfolios generally comprise of large firm and high P/B stocks, thus defying the risk story. Some zero investment momentum based trading strategies do provide significant payoffs. We also observe momentum profits in sectoral returns. A part of stock momentum profits is captured by sectoral factor, thus implying that it may mainly be an outcome of sectoral momentum. Our findings are pertinent for portfolio managers and investment analysts who are continuously in pursuit of trading strategies that provide abnormal returns.