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Improved Momentum Strategy Profitability Analysis

Posted on:2007-03-04Degree:MasterType:Thesis
Country:ChinaCandidate:J X HaoFull Text:PDF
GTID:2199360215481975Subject:Financial engineering
Abstract/Summary:PDF Full Text Request
One investment strategies called momentum strategies which are based on continuations in stock prices have become increasingly popular among academics, money managers, and investors in recent years. However, whether this kind of strategy can bring us excess profit is also becoming the focus of debating among academics. The implementation of momentum strategy is afflicted with many difficulties. The key thing is chasing momentum strategies can generate high turnover ratio which will rise the trading cost and the much of the potential profits from momentum strategies may be dissipated by transaction costs.We test several different momentum strategies based exclusively on the stocks exchanging on Chinese A stock market and try to find out the most profitable momentum strategy that especially fit to Chinese stock market. According to the real situation of our Chinese stock market, we do not make such an assumption that there exists a zero-cost arbitrage portfolio, that is because selling short the 'loser decile' (including the stocks with the lowest past performance) is not allowed in Chinese market. So we just buy the 'winner decile' (including the stocks with the highest past performance). By introducing other variables step by step in the formation period, looking into the profitability of the momentum portfolios, we finally find the particular kind of momentum strategy which can achieve the highest returns.In the very beginning, by introducing a n-month lag between the formation and holding period, and calculating the results for different n (n=0,1,2,3...), we come to a conclusion that we get the most profitable momentum strategy when n is equal to 2, but not 1. To follow with, we additionally rank the stocks on the basis of their average arithmetic in stead of geometric mean returns over the formation period. As a result, the profit is promoted to a much higher level. And after that, we successfully introduce the relative turnover to our strategies. We find out that an additional sorting based on the ratio of the turnover in the last month before portfolio formation to the average monthly turnover over the past J months could also increase the returns to our momentum strategies. In the end, we calculate the transaction costs of our momentum strategies in Chinese stock market in our analysis. We conclude that the trading costs of our strategies would not dissipate the excess earnings of momentum portfolios under the current taxation environment.
Keywords/Search Tags:momentum strategies, winner decile, transaction cost, turnover ratio
PDF Full Text Request
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