ARticle To Read
ARticle To Read
1. Introduction
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
4 Rajagiri Management Journal
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.
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).
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.
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)
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
(3)
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).
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
(7)
(8)
(9)
m = no iteration.
(10)
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.
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.
* 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.
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 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)*
(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)
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.
4. Concluding Remarks
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