MOMENTUM STRATEGIES : EVIDENCE FROM THE PACIFIC-BASIN STOCK MARKETS

Abstract

The momentum investment strategies are implemented on securities traded on six Asian markets: Hong Kong, Malaysia, Singapore, South Korea, Taiwan and Thailand. Price momentum is evident in the smallest firms and the firms with high turnover. For example, the momentum strategy that invests in the smallest 30 percent of firms across the six markets generates an average monthly excess return of 1.21 percent over a six- month holding period. The average monthly profit is 1.12 percent if the strategy is implemented on only the top 30 percent of all firms in terms of trading volume (turnover). While these are the significant strategies, the more general, unrestricted momentum strategies of buying the winners and selling the losers generate insignificant returns across various holding periods. Following Jagadeesh and Titman ( 1993) and Rouwenhorst (1998). 16 unrestricted momentum strategies are implemented, that involve ranking securities based on their J-month performance (J=3,6,9 and 12) and subsequently evaluating the returns over the next K-months (K=3,6,9 and 12). None of the 16 strategies produce significant momentum returns. Since the standard deviation of returns from the unrestricted strategies is considerably large, the zero-cost portfolio appears to be poorly diversified. Consequently, a number of restricted strategies are also implemented to obtain better-diversified portfolios, by taking into consideration country, size as well turnover factors. Of these strategies, only the country-neutral strategy produces a statistically significant return of 0.37 percent, which is consistent with the 0.39 percent monthly returns reported in Rouwenhorst (1999). The strong price momentum effect for small firms might be driven by the hypothesis that firm-specific information, especially negative information, diffuses only gradually across the investing public. Since small stocks tend to disseminate information more slowly to the public, then if momentum comes from gradual information flow, then there should be more momentum in these stocks. Meanwhile, the results on turnover-based sub-samples indicate the presence of overconfident traders. This subsequently results in market underreaction to the information by rational traders and the subsequent momentum in stock prices in high volume stocks. Additionally, high trading volumes are often associated with the stocks of small firms. Thus, it is not surprising to find that the implementation of momentum strategies yield comparable results in small or heavily traded stocks.