Rajagiri Management Journal

Volume 9, Issue 2, December 2015

An Analysis of Momentum Strategies

in Indian Stock Returns
Martin Bernard1 and Malabika Deo2

In this paper we examined the possibility of profit in price

momentum strategy in the Indian equity market, which is one of
the most promising emerging markets. We also investigated the
relationship between momentum profits and historical trading
volume. Our sample comprised of the blue-chip stocks represented
in BSE-100 index. Our empirical results found strong presence
of momentum phenomenon in the Indian market, and also
reported that the winners’ portfolio contributes more to momentum
return in line with the findings of Griffin et al. (2005). To measure
the effectiveness of volume-based price momentum strategies,
we replicated methodology used by Lee & Swaminathan (2000)
and Naughton, Truong, & Veeraraghavan (2008) and found that
historical trading volume has no role in boosting the magnitude
of momentum return. However, the study revealed that winners’
portfolios have higher turnover in comparison to their
counterparts.

Keywords: Price momentum strategies, Trading volume,

Efficient market hypothesis, Abnormal return,
Indian equity market.

1. Introduction

Literature of finance has witnessed several discussions on the subject of ‘prior

return effect’. Prior return effect in equity market represents that past return
can explain the cross-sectional behaviour of succeeding security return.
Researchers often reported two basic types of phenomenon regarding the return

1
PhD Scholar, Department of Commerce Pondicherry University, Puducherry, India.
E-mail: [email protected]
2
Professor, Department of Commerce, Pondicherry University, Puducherry, India.
E-mail: [email protected]
 Martin Bernard and Malabika Deo

predictability on the basis of prior returns data: “the return continuation” and
“return reversal.” In order to get a complete knowledge about prior return effect
we have to go all the way back to 1985. The pivotal study of De Bondt and
Thaler (1985) documented evidence of return reversal (contrarian strategies)
from the U.S. equity market. Contrarian strategy is that, investors can generate
abnormal returns by buying prior poor-performing equities and taking short
position in prior high-performing equities over long-term holding portfolios.
They justified their results with investor’s overreaction hypothesis, i.e.
overreaction of investors to new piece of information and their subsequent
correction over long horizon. In a subsequent work, De Bondt and Thaler (1987)
found supportive evidence to their earlier findings that the past loser firms
significantly outperform past winner’s firm in their performance in the market
supporting the investor’s overreaction hypothesis. Later, in the same direction,
Jegadeesh (1990) and Lo & Mackinlay (1990) evidenced successful contrarian
strategies for very short-horizon portfolios spanning from a week to three-month
period. Following these path-breaking pieces of evidence, Jegadeesh and Titman
(1993) analyzed the U.S. market data and documented clear evidence of return-
continuation (momentum strategy) and return-reversal (contrarian strategy)
investment strategy. Explicitly, for medium-term holding period (3 to 12 months),
the ‘momentum’ strategy was found to give abnormal return and for long-
horizon holding portfolios (1 to 3 years), ‘contrarian’ strategy provided more
return to investors.

Many empirical studies have reported that both momentum and contrarian
investment strategies provide abnormal return to investors. Subsequent to
Jegadeeshand Titman (1993), an early U.S. study, Cornard and Kaul (1998),
examined the NYSE and AMEX stocks and found medium-term price
continuation. A recent U.S. study by Wang and Wu (2011) also reported
significant momentum profit over a medium-term horizon. The reported
evidence of momentum profit has not been confined only to the U.S. stock
market. Rouwenhorst (1998) and Doukas & McKnight (2005) examined a
number of European markets and documented similar findings. Griffin, Ji, &
Martin (2003) and Hameed & Kusandi (2002) analyzed Asian stock markets,
Richards (1997), Chan, Jegadeesh, & Wermers (2000), and Balvers & Wu (2006)
examined a wide range of global markets, and all found significant momentum
and contrarian profit over the medium- to long-term horizon. Similarly, Demir,
Muthuswamy, & Walter (2004), and Naughton (2008) found strong evidence
of momentum return from the Australian and Chinese markets respectively.

There are many academic studies that have assessed the reason why momentum/
contrarian portfolios may exist in security markets. The explanation can be
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An Analysis of Momentum Strategies in Indian Stock Returns

broadly grouped into two, i.e. risk-based and behavior-based explanations. Chan
(1988), Ball & Kothari (1989), and Conard & Kaul (1998) documented risks
associated with securities in momentum/contrarian portfolios as the major
determinant of above-average returns of these portfolios but the model failed
to capture medium-term continuation of price. Whereas, Jegadeesh & Titman
(2001, 2002) provided evidence contradicting Cornard & Kaul (1998) hypothesis
and documented the robustness of various price-momentum strategies. On the
other hand, Barberis, Shleifer, & Vishny(1998); Daniel, Hirshleifer &
Subrahmanyam (1998); and Hong & Stein (1999) developed the behavioural
models which assume investors’ psychological and personal traits to be the
reason of the momentum phenomenon. Behaviourists identified either investor-
cognitive bias or investor’s initial underreaction to new information and later
rectification to be the causes of abnormalities. Later, Lee & Swaminathan (2000),
Jegadeesh & Titman (2001), and Griffin, Ji, & Martin (2003) substantiated the
significance of behavioral models in momentum phenomenon.

Another interesting area among financial-market researchers happens to be

the investigation on how momentum and contrarian strategies relate to other
fundamental factors of a security. Earlier, Blume, Easley, and O’ hara (1994)
documented that investors can derive valuable information about security
returns by analyzing the historical trading volume and historical security prices.
Datar, Naik, and Radcliffe (1998) showed that low (high) volume firms earn
higher (lower) future returns. Lee and Swaminathan (2000) reported an
asymmetric relation between past returns and trading volume; that is, the
extreme winners have a higher trading volume than extreme losers. They found
that historical trading volume can reconcile medium-term ‘underreaction’ and
long-term ‘overreaction’ effects and also reported that past trading volume can
predict the magnitude and persistence of price momentum. Chui, Titman, &
Wei (2000), Hameed & Kusnadi (2002), and Connolly & Stivers (2003) reported
supporting evidence from different markets corroborating the findings of Lee
and Swaminathan (2000). However, studies from Japanese stock market by
Lihara, Kato, and Tokunaga (2003) found contrary results to the findings of
Lee and Swaminathan (2000) documenting that trading volume is weakly linked
to momentum and reversal effect. The results from the Chinese stock market by
Naughton, Truong, and Veeraraghavan(2008) do not suggest volume as an
important factor, because they too find no strong link between past volume
and momentum return.

Grinblatt and Moskowitz (2004) documented that the loser’s portfolios contribute
more profit to momentum portfolios. They also subscribe that the loser’s
portfolios contain small and illiquid securities and the domination of these
Rajagiri Management Journal 5
 Martin Bernard and Malabika Deo

securities are ascribed with high transaction cost. Griffin, Xiuqing, and Spencer
(2005) analysed momentum phenomenon in 40 markets around the globe and
documented that long position in winner’s portfolios contribute to momentum
return. Later, Ali & Trombley (2006) and Ammann (2010) supported the findings
of Grinblatt and Moskowitz (2004).

In Indian context, Sehgal and Balakrishnan (2002) obtained significant evidence

of long-term return-reversal tendency and short-term momentum effect in
Indian equities. In another study by Sehgal and Balakrishnan (2008) attempted
to explain through the Fama-French three-factor model the source of momentum
profits in the Indian context which was found to be rational. Rastog,
Chaturvedula, and Bang (2009) analyzed momentum and overreaction effect
in Indian markets and reported strong evidence of momentum and weak
existence for overreaction effect. Joshipura (2011) analyzed the presence of
momentum effect using large liquid stocks in Indian markets and reported
strong presence of momentum return. Shegal and Jain (2011) assessed the
presence of momentum effect in stock and sector returns and the power of the
risk-factor model to explain it. However, they found that the pattern of
momentum return in the Indian context was not explained through rational
models. Ansari and Khan (2012) found a strong presence of momentum profit
in the Indian context and pointed out the significance of behavioural factors as
sources of momentum profit. Balakrishnan (2012) reported the presence of
strong momentum return in Indian markets. Agarwalla, Jacob, and Varma
(2013) attempted the combination of Fama-French three-factor returns and
momentum-factor returns and found 22 per cent of momentum-factor returns
annually.

In the background of this research review, the present study attempted to

investigate the momentum trading in India by examining the link between
momentum profits and trading volume. Our primary objective is to enquire
into the possibility of price-momentum strategy in Indian market and an
extended analysis of the contribution made by loser and winner portfolios to
momentum profits. The study also investigated the relationship between
momentum profits and historical trading volume. We attempted to analyze the
immediate-horizon relationship between the historical trading volume and
historical security returns. This analysis is aligned with the methodology adopted
by Lee & Swaminathan (2000) and Naughton, Truong, & Veeraraghavan (2008)
in the U.S. and Chinese equity markets respectively. It is interesting to investigate
intermediate-horizon relationship of momentum return for Indian equities, as
Indian stock market is considered to be one of the most promising markets
among emerging markets, attracting a large number of foreign and domestic
6 Rajagiri Management Journal
An Analysis of Momentum Strategies in Indian Stock Returns

investors. In sum, we indirectly tried to investigate the weak-form market

efficiency in Indian equity market with the help of past share price and trading
volume.

The study reveals a strong presence of momentum pattern in Indian stock return
and finds the main determinant of momentum profit to be the winner’s securities
as the contribution of winner’s portfolios are found to be more for hedge portfolio
in comparison to loser’s portfolios. Furthermore, the study confirms that in the
Indian context, past trading volume has no role in increasing the return of
momentum strategy. The reminder of the paper is structured as follows. Section
2 deals with the data and research methodology employed. Section 3 presents
the results of the empirical work and section 4 concludes this paper.

2. Data and Methodology

2.1 Sample Data

The sample for the present study has been collected from the universe of
companies listed on the Bombay Stock Exchange (BSE). Monthly data of
companies included in the BSE-100 index comprising adjusted closing prices,
trading volume and number of shares outstanding over a period of eight years
starting from August 2004 till July 2012 were collected. Adjusted monthly stock
price adjusts for all corporate actions such as stock splits, dividend distribution
and new offering. We restrict our sample only to the blue-chip stocks of the
BSE-100 index, so that the problem of small and illiquid securities could be
avoided. This sample-selection criterion was aimed to create low-cost momentum
strategies in the equity market of India. The return on BSE Sensex is used as
proxy for the return on market portfolio. All constituent stocks with non-missing
data for the entire study period were included in the analysis. After avoiding
companies with missing data the final sample size was 80 companies. The data
were obtained from the CMIE (Centre for Monitoring of Indian Economy)
Prowess and BSE database.

2.2 Methodology

The study adopted the methodology of Jegdeesh and Titman (1993) to construct
the price- momentum portfolios and approaches of Lee and Swaminathan (2000)
to construct the volume-based price-momentum portfolios. These approaches
are based on JxK strategy, as explained later. The important steps followed in
the study for analysing the portfolio return in both formation and holding period
is discussed under.
Rajagiri Management Journal 7
 Martin Bernard and Malabika Deo

As the first step, the study converted the entire monthly individual security price
into monthly percentage return series. The monthly percentage return is
calculated as

(1)

Where, Pi,t= the price of stock i in the period t,

Similarly, the monthly return for the market index also were calculated as:

é M i ,t ù
M = ln ê ú (2)
m ,t
êë M i , t - 1 úû

Where Mi,t= closing value of market index in the period t,

After findingthe monthly percentage return, abnormal return of securities were

calculated. Here market-adjusted model was used for estimating abnormal
return and the model is as follows.

(3)

Where AR j,t = abnormal return of security ‘i’ in the period ‘t’.

Likewise trading volume was converted into monthly turnover ratio

Trading volume of stock i

Turnover Ratio = (4)
Number of shares outstanding for stock i

2.2.1 JxK Strategy

It is a strategy that selects securities based on the performance for past ‘J’ months
(i.e. formation period) and holds them for ‘K’ months (holding period). At the
end of every month,‘t’, the securities are ranked in ascending order, on the basis
of past abnormal returns and past trading volume. Then stocks are assigned to
one of five portfolios (R1, R2, R3, R4 and R5) based on cumulative abnormal
return of ‘J’ months and one of three portfolios (V1, V2 and V3) based on the
trading volume over the same period (J= 3, 6, 9 and 12 months). The portfolios
8 Rajagiri Management Journal
An Analysis of Momentum Strategies in Indian Stock Returns

are then held for K months (K= 3, 6, 9 and 12 months). This results in each
month fifteen momentum–volume portfolios in any combination of JxK and
sixteen trading strategies using various combinations of J and K months.

The first (R1) and last (R5) portfolios based on past abnormal of stocks are
termed as the “loser” and “winner” portfolios respectively. In the holding period,
the abnormal performance of securities in the winner and loser portfolios are
measured. Returns for holding period are based on equally-weighted abnormal
return of every stock in the winner and loser portfolios. This strategy involves,
an arbitrage portfolio (zero investment) that implies simultaneous buying of
winners and selling the losers and holding this position for next K months
(holding period).

(A) Formation Period (J months)

In the formation period, we created two types of portfolios, i.e. price-momentum

portfolios based on past abnormal return and volume-based momentum
(double-sorted) portfolios based on past abnormal return and turnover ratio.
For ranking the securities, cumulative abnormal return (CAR) and cumulative
turnover ratio (CTR) at the end of the each formation period were considered.
In order to measure CAR and CTR, the following formulae were used:

0
CAR = å ARit (5)
t=J

th th
Where, ARitdenotes the abnormal return of i stock for the t formation month.

0
CTR = å TRit (6)
t=J

th th
Where, TRitdenotes turnover ratio of i stock for the t formation month.

After estimating CAR and CTR, both price-momentum portfolios and volume-
based momentum portfolios were created. This was done at the end of every
month during the study period. This overlapping study period was expected to
ensure more robust results. Jegdeesh and Titman (1993, 2001) had suggested
that overlapping portfolios in momentum approaches helps to control bid-ask
bounce effect of security prices.
Rajagiri Management Journal 9
 Martin Bernard and Malabika Deo

(B) Holding or Testing Period (K months)

In post-formation period, mainly the abnormal performance of two (out of 5)

price-momentum portfolios and four (out of 15) price-momentum and volume
portfolios were analysed. These portfolios were winners (R5), losers (R1) low
volume losers (R1V1), high-volume losers (R1V3), low-volume winners (R5V1)
and high-volume winners (R5V3). In the first step of the testing period, study
estimated the monthly average abnormal returns (AAR) by taking the mean of
monthly abnormal returns of portfolio stocks. This step was repeated for each
iteration over the study period. In the next step, the MAAR (mean average
abnormal return) was calculated by averaging the average abnormal return of
‘m’ iterations. MAARs for different portfolios were estimated by using the
following formulae:

(7)

(8)

(9)

Where, n= number of stocks in each portfolio,

T= 3-12 months (holding period)

m = no iteration.

In order to measure the momentum return, the present study followed an

arbitrage strategy (zero-cost strategy), that is simultaneous buying of winner
stocks and selling of loser stocks. So price momentum return equals to return
of winner stocks minus return of loser stocks (symbolically MAARR5-R1). Further,
attempt was made to analyse the link between historical trading volume and
momentum profit. In order to measure the return of zero-cost volume based
price-momentum strategy, the following formula was used:

(10)

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An Analysis of Momentum Strategies in Indian Stock Returns

After estimating the return of above mentioned portfolios, simple t-test was
applied to test the significance. Similar procedure was followed for all sixteen
combinations of volume-based momentum portfolios.

3. Results and Discussion

This section reports the returns for different price-momentum and volume-
based momentum strategies implemented on the Indian equity market during
the period from 2004 through 2012. Our empirical results found strong presence
of momentum phenomenon in the Indian context. Interestingly, unlike the U.S.
evidence, our results showed that historical trading volume has no role for
boosting the magnitude of momentum return.Subsection 3.1 presents themean-
average –abnormal-return test (MAAR of winners, losers and momentum
portfolios) results of simple price-momentum strategies. Subsection 3.2 presents
the results of volume-based price- momentum strategies for the sample firms.

3.1 Return of Simple Price Momentum Strategies

The monthly mean average abnormal returns of all sixteen combinations of

winners (W), losers (L) and momentum (W-L) portfolios given in Table 1
indicate the contribution made by winner and loser portfolios to the
momentum portfolios during the study period. Figure1 presents the graphical
depiction of the MARR for all sixteen price-momentum strategies.

Table 1: MAAR Values of Winners, Losers and Momentum

Portfolios for Sixteen Strategies

Mean Average Abnormal Returns

J K 3 6 9 12

3 W 1.16 0 .83 0.75 O.72

(5.19)* (2.45)* (4.31)* (5.02)*

3 L -0.51 -0.44 -0.5 -0.39

(-3.20)* (-2.18)* (-3.12)* (-2.91)*

3 W-L 1.67 1.27 1.25 1.11

(5.81)* (2.49)* (4.52)* (5.15)*

Rajagiri Management Journal 11

 Martin Bernard and Malabika Deo

6 W 1.19 0.99 0.78 0.61

(6.69)* (6.56)* (5.38)* (4.35)*

6 L -0.49 - 0.54 -0.4 -0.35

(-7.34)* (-7.72)* (-6.25)* (-5.09)*

6 W-L 1.68 1.53 1.18 0.96

(7.36)* (9.41)* (6.62)* (5.46)*

9 W 1.76 1.04 0 .69 0.65

(2,86)* (2.11)* (1.79)* (2,27)*

9 L -0.99 -0.43 -0.29 -0.19

(-1.73)* (-1.07) (-0.91) (-0.94)

9 W-L 2.75 1.47 0.98 0.85

(2.32)* (1.65)* (1.40)** (1.73)*

12 W 1.05 0.57 0.51 0.51

(1.91)* (1.83)* (2.33)* (3.12)*

12 L -0.74 -0.55 -0.48 -0.31

(-1.55)** (-2.36)* (-2.82)* (-2.16)*

12 W-L 1.79 1.12 0.99 0.83

(1.74)* (2.13)* (2.65)* (2.97)*

* Significant at 5% level
** Significant at 10% level.
Figures in brackets are the t- statistics of winners, losers and momentum portfolios.

The results indicated strong presence of momentum in Indian equity market as all
MAARs were significant. Our findings were in consonance with the findings of
Sehgal & Balakrishnan (2002, 2008), Rastog, Chaturvedula, & Bang (2009),
Joshipura (2011), and Sehgal & Jain (2011), Ansari & Khan (2012), and
Balakrishnan (2012).The monthly MARR value for momentum strategies was
significant at 5 per cent level in most of the cases except 9x9 trading strategy which
was significant at 10 per cent level. From the sixteen combinations, the monthly
MAAR of momentum portfolio ranged from a low 0.83 per cent for 12 months
formation and 12 months holding period to a high of 2.75 per cent for 9 months
12 Rajagiri Management Journal
An Analysis of Momentum Strategies in Indian Stock Returns

formation and three months holding period. Such momentum returns have been
contributed by both winner and loser portfolios and contribution of winner portfolio
was found relatively higher than loser portfolios in most of the cases. It was also
noted from the table that momentum return showed the highest monthly return in
K=3 and it gradually reduced when the holding period was extended to more than
3 months. In other words, J momentum return (W-L) at K=3 was the best and it
slid down as the holding period was extended to 6, 9 and 12 months.

Figure1: MAAR Values of Momentum Portfolios for Sixteen Strategies

It is clear from Figure 1 that all the formation (J months) periods have the
highest MAAR value in their respective three-month holding (K=3) period,
which is followed by a steady decline consistently for rest of the higher-
order holding periods, i.e. K6, K9, and K12. It is further observed that the nine-
month formation period gives the highest return when K=3. However, a steep
downward sloping trend from left to right is also observed for this formation
period.

3.2 Return of Immediate Horizon Volume-Based Price Momentum

Portfolios

In volume-based price momentum strategy, the queries like whether there is

any significant connection between future security returns and historical trading
volume for securities in Indian equity market has been investigated. This
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 Martin Bernard and Malabika Deo

subsection analyses the returns of double-sorted portfolios created on the basis

of historical return and historical trading volume. The study created
momentum portfolios on a monthly basis. Hence, at the end of every month,
all eligible stocks based on their previous J-month cumulative abnormal
return were arranged in ascending order and were assigned to five equal
size and equally weighted portfolios (R1 to R5). R1 is the loser’s portfolio
stocks and R5 is winner’s portfolio stocks. In each portfolio, stocks again
were sorted in ascending order based on their cumulative trading volume
over the formation (J) period and were assigned to three-volume portfolios
from V1 to V3. V1 representing lowest volume portfolio and V3 is highest volume
portfolio. Thus sixteen combinations of volume-based price momentum
strategies could be created using the trading volume and return of previous
J months (J=3, 6, 9, and 12) and the intersection of trading volume and
return resulting 15 price momentum-volume portfolios for every
combination of J months. In order to assess the performance of extreme
winners and loser portfolios, the portfolio returns were evaluated over the
next K (holding period) months, where K= 3, 6, 9, and 12 months. Table 2
presents the holding period MAAR values of all sixteen combinations of
volume-based momentum strategies. It may be noted that formation-period
volume of portfolios is nothing but the mean monthly turnover during the
formation period.

An analysis of the results presented in Table 2 interestingly revealed a positive

relation between formation-period return and trading volume. The result
in column 3 (volume) indicated that winners portfolio (R5) have higher
average monthly turnover than losers portfolio (R 1) for every J-month
formation period. As it can be seen that at 6 months formation period (J=6),
the average monthly turnover of R1and R5 portfolios were 0.72 per cent and
0.92 per cent respectively. This result finds supports from the study of Lee &
Swaminathan (2000), which documented that extreme winners (R5) have
higher turnover (trading volume) than extreme losers (R 1) during the
formation period.

Table 2 also reports the MAAR values of volume-based price-momentum

portfolios during the holding (K) period (where, K=3, 6, 9 and 12) which
indicate that most of the low volume zero-cost portfolios (R5V1-R1V1) have
performed better than high volume zero-cost portfolios (R5V3-R1V3) except
3x3, 6x3, 6x6, 6x9, 12x9 and 12x12 holding-period portfolios. Lee and
Swaminathan (2000) had argued that price momentum returns are more
pronounced among higher turnover securities. But we did not find such a
pattern during the period of study. From all the sixteen combinations under
14 Rajagiri Management Journal
 Table 2: MAAR Values of Portfolios Sorted on the Basis of Past Returns and Trading Volume
for the Period of 2004-2012

K=3 K=6 K=9 K=12

J Portfolio Volume V1 V3 V3-V1 V1 V3 V3-V1 V1 V3 V3-V 1 V1 V3 V3-V1

3 R1 0.3537 0.15 -1.02 -1.17 0.16 -0.74 -0.91 -0.08 -0.78 -0.7 -0.03 -0.69 -0.67

(0.09) (-0.59) (-0.67) (0.76) (-2.54)* (-2.22)* (-0.28) (-2.72)* (-2.17)* (-0.12) (-3.03)* (-2.48)*

Rajagiri Management Journal

R5 0.4766 2.07 0.98 -1.09 1.54 0.57 -0.97 1.27 0.45 -0.82 1.08 0.37 -0.71

(1.2) (0.57) (-0.63) (4.42)* (1.45)** (-4.22)* (4.32)* (1.62)** (-3.52)* (4.06)* (1.59)** (-3.06)*

R5-R1 1.92 2.00 0.08 1.37 1.31 -0.06 1.35 1.23 -0.13 1.11 1.06 -0.04

(1.11) (1.16) (0.05) (2.77)* (2.15)* (-0.12) (3.54)* (2.37)* (-0.32) (3.58)* (2.67)* (-0.15)
An Analysis of Momentum Strategies in Indian Stock Returns

6 R1 0.7208 0.16 -1.35 -1.51 -0.05 -1.33 -1.28 -0.03 -1.12 -1.08 -0.08 -0.92 -0.84

(0.09) (-0.78) (-0.87) (-0.24) (-8.31)* (-6.20)* (-0.18) (-7.48)* (-4.23)* (-0.50) (-6.98)* (-3.58)*

R5 0.9157 1.77 0.58 -1.19 1.37 0.45 -0.93 1.30 0.21 -1.09 1.12 0.21 -0.91

(1.02) (0.33) (-0.69) (4.93)* (1.98)* (-3.49)* (6.47)* (1.15)** (-5.21)* (6.70)* (1.37)** (-4.83)*

R5-R1 1.60 1.93 0.32 1.42 1.78 0.36 1.33 1.33 0.00 1.20 1.13 -0.07

(0.93) (1.11) (0.19) (14.40)* (5,09)* (1.13) (14.62)* (4.22)* (-0.01) (15.98)* (4.35)* (-0.25)

15
16
9 R1 1.0992 -1.01 -0.89 0.12 -0.33 -0.68 -0.35 -0.26 -0.47 -0.21 -0.23 -0.43 -0.21

(-0.58) (-0.51) (0.07) (-0.56) (-2.71)* (-0.95) (-0.62) (-1.63)** (-0.59) (-0.78) (-2.20)* (-0.77)

R5 1.2893 2.10 1.29 -0.81 1.77 0.48 -1.29 1.43 0.26 -1.18 1.36 0.26 -1.10

(1.21) (0.75) (-0.47) (5.61)* (0.67) (-3.04)* (5.14)* (0.51) (-3.81)* (6.46)* (0.71) (-4.57)*

R5-R1 3.11 2.19 -0.64 2.10 1.16 -0.94 1.7 0.73 -0.97 1.59 0.7 -0.89

(1.80)* (1.26) (-0.37) (2.35)* (1.22) (-5.25)* (2.60)* (0.97) (-3.27)* (3.51)* (1.31)** (-3.91)*

12 R1 1.5151 -0.65 -0.76 -0.15 -0.34 -0.90 -0.57 -0.28 -1.01 -0.74 -0.12 -0.98 -0.86

(-0.37) (-0.46) (-0.08) (-1.14) (-2.90) (-1.91)* (-1,33)** (-4.38)* (-3.43)* (-0.63) (-5.67)* (-3.78)*

R5 1.6574 1.44 0.8 -0.65 0.92 0.29 -0.63 0.87 0.23 -0.64 0.86 0.29 -0.57

(0.83) (0.46) (-0.37) (2.91)* (0.77) (-3.37)* (4.03)* (0.89) (-4.53)* (5.17)* (1.43)** (-5.76)*

R5-R1 2.09 1.59 -0.50 1.26 1.20 -0.06 1.14 1.25 0.10 0.98 1.27 0.29

(1.21) (0.92) (-0.29) (2.19)* (2.18)* (-0.19) (2.91)* (3.21)* (0.45) (3.10)* (4.65)* (1.25)

**Significant at10% level, *Significant at 5% level.

Figures in brackets are the t- statistics of winners, losers and momentum portfolios.
Martin Bernard and Malabika Deo

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An Analysis of Momentum Strategies in Indian Stock Returns

observation, most of (R5V3-R5V1) – (R1V3-R1V1) portfolios were followed with

negative returns except 3x3, 6x3, 6x6, 6x9, 12x9 and 12x12 holding-period
portfolios. A closer examination reveals that these negative returns are
because of the outperformance of low volume zero-cost portfolios (R5V 1-
R1V1) over high volume zero-cost portfolios (R5V3-R1V3). At J=9 and K=6,
the MARR values of (R 5 V 3 -R 1 V 3 ) and (R 5 V 1 -R 1 V 1 ) were 1.16 and 2.10,
respectively, the difference of -0.94 per cent per month was statistically
significant. Though, a few volume-based price momentum (R 5V 3-R 5V 1) –
(R1V3-R1V1) portfolios showed positive returns, they were not statistically
significant. Therefore, the findings suggest that, price momentum return is
not that very pronounced among high trading volume stocks.

The results also revealed that at immediate horizon the MAAR values of low
volume stocks were greater than MAAR values of high volume stocks and
this result was consistent with the findings of Datar, Naik, & Radcliffe (1998),
which argue that higher monthly MAAR value of low volume stocks generates
negative return to the V3-V1 portfolios. For example, for J=3 and K=6, the
monthly MAAR values of R1V1 and R1V3 are 0.16 per cent and -0.74 per cent
respectively and this in turn gave negative return of -0.91 per cent per month
with a t-statistic of -2.22 for V3-V1 portfolio. The study found similar return
pattern for almost all JxK strategies except the 9x3 month strategy, where
high volume winners were outperforming low volume winners by 0.12 per
cent per month. It was also observed that, after adjusting past trading volume
into momentum portfolios, the price momentum premiums either were
negative or got reduced. This may be because, after creating volume-based
portfolios the MAAR values of R5 (V3-V1) portfolios were found lower than
the MAAR value of R1 (V3-V1) portfolios. The result was more explicit for the
9x9 month strategy, where average monthly abnormal return of R5 (V3-V1)
and R1 (V3-V1) portfolios are -0.21 per cent and -1.18 per cent respectively
and this, in turn, results in a negative return of -0.97 per cent per month
with a t-statistic of -3.27 for momentum portfolios (R5 –R1). Most of the
other cells showed more or less the same pattern of momentum return in
the immediate horizon. Results also indicate that once price momentum is
controlled, the low volume stocks portfolios outperformed high volume stocks
portfolios. But this effect was found more pronounced among winner
portfolios. Therefore, momentum portfolios were seen with continuous
negative returns over the one year period. From the above observation
inference was drawn in the line that there was no dominant and consistent
link between past trading volume and price momentum return in Indian
equity market over the immediate horizons.

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 Martin Bernard and Malabika Deo

4. Concluding Remarks

In this study, we investigated the presence of momentum phenomenon in

Indian scenario. We also analysed various volume-based momentum
strategies for Indian equities. In order to analyse these objectives, we used
blue-chip stocks contained in BSE-100 index over the period of 2004- 2012.
We followed Jegadeesh & Titman (1993) and Lee & Swaminathan (2000)
approaches and formulated sixteen JxK combinations of momentum
portfolios with overlapping formation and holding periods. We estimated
the MAAR values of winner, loser and momentum portfolios and found
economically and statistically significant abnormal return from momentum
strategies indicating strong presence of momentum pattern in security
returns in Indian equity market for a medium-term holding period.

However, when compared to the contribution of winners and losers, it was

observed that winners are contributing more to momentum portfolio. These
empirical findings lead to two inferences for Indian equity market scenario:
first, winners’ portfolio mostly contribute to momentum return, and the
second, small and illiquid stocks may prove to be the main driver of returns
generated by losers’ portfolio. As we had excluded illiquid securities from
losers’ portfolios, it did not contribute much to the momentum return and,
had there been illiquid security in the sample, there was possibility of return
in losers’ portfolio. Our results were consistent with the findings of Grinblatt
& Moskowitz (2004), Griffin, Xiuqing, & Spencer (2005), Ali & Trombley
(2006), and Ammann (2010).

In the later part of the analysis, we studied the immediate-horizon relationship

of historical trading volume with historical security returns along with the
performance of low and high trading volume stocks. Our analysis exhibited
that in Indian market, high-performing stocks have higher turnover than low-
performing stocks during the formation period. This result gets support from
the findings of Lee and Swaminathan (2000) for the U.S. markets, which had
documented that extreme winners’ portfolios have high trading volume than
extreme losers’ portfolios. We also found that there is no role for historical
trading volume in boosting the magnitude of momentum profits in Indian
equity market. Therefore, it can be concluded that the results were not strong
enough to establish the relationship between trading volume and stock return
as were evidenced in previous studies like Lee & Swaminathan (2000) and
Connolly & Stivers (2003).
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An Analysis of Momentum Strategies in Indian Stock Returns

Through this analysis, the presence of momentum phenomenon in Indian

markets has been re-established, in line with a few earlier studies conducted
for Indian market. Even though two informational apparatus of technicians
i.e. security price and trading volume were not found working together for
determining the magnitude of the momentum effect, this study indirectly
repudiate the existence of weak-form market efficiency of Indian market.

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