Momentum Effect and Market States: Emerging Market Evidence


Finance

Momentum Effect and Market States: Emerging Market Evidence

Capital Assets Pricing Model (CAPM) of Sharpe [23], Lintner [16] and Mossin [17] states that expected returns on securities have a positive linear relation with their betas thus beta is the sole factor that explains the cross-section of expected returns. Though early studies by Black, Jensen and Scholes [5] and Fama and MacBeth [11] provided evidence in favour of CAPM, subsequent empirical studies found evidence against the CAPM (see for example, Basu [3] and Banz [2]).
Jméno a příjmení autora:

Chandrapala Pathirawasam, Milos Kral

Rok:
2012
Ročník:
15
Číslo:
2
Strany:
115 - 124
Klíčová slova:
Momentum effect, Colombo stock exchange, market states
DOI (& full text):
Anotace:
This paper examines the momentum effect in Colombo Stock Exchange (CSE) from January 1995 to December 2008. The sample of the study includes all the voting stocks traded at CSE. Stocks are selected…více
This paper examines the momentum effect in Colombo Stock Exchange (CSE) from January 1995 to December 2008. The sample of the study includes all the voting stocks traded at CSE. Stocks are selected for the strategies implemented in this study based on their returns over the past 3, 6, 9 and 12 months and hold the selected stocks for 3, 6, 9 and 12 months respectively. This gives a total of 16 strategies. In order to identify the relation between market states and momentum effect, the entire sample is divided into two sub periods, January 1995 to September 2001 and October 2001 to July 2008. The first sub period was mainly bearish and the second sub period was mainly bullish. For the overall sample, all the strategies show positive and statistically significant momentum effects. When there is a time lag between the formation period and the holding period, the most successful momentum strategy is the 12 months/3 months strategy where stocks are selected based on their returns over the past 12 months and then holds them for next 3 months.This strategy yields returns of 0.728 percent per month. Further, the momentum effect is stronger in the down market stance than in the up-market stance. In the up-market, virtually all the portfolios are winners since difference between return on the winner portfolios and return on the loser portfolios are negligible. By contrast, in the down-market stance, all the winner portfolios are positive while all the loser portfolios are negative. Hence the winner portfolios significantly outperform the loser portfolios.
Sekce:
Finance

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