Research On The Momentum Effect Of Pakistan Stock Market

The purpose of this study is to explore the relationship between market volatility and momentum profitability by using sample of eighty companies listed at Karachi Stock Exchange for the period 2006 to 2018.The companies are selected randomly.Time series regression based on OLS estimation technique is used to examine the role of market state,volatility and business cycle in estimating the market returns portfolio.This study indicates that market state volatility has significant power to predict momentum payoffs,especially in negative market states.Furthermore,the results are context in the existence of market state and business cycle variables.Market premium is significant and negative.Market volatility is also found negatively influencing momentum profits.However,when volatility is divided into volatility in positive market and volatility in negative market both are significantly and negatively influencing momentum profits.Although Vol+ and Volboth have negative signs,Vol-is dominating in conditions of the magnitude of the coefficient and the t-statistics.Business cycle effect measured by term and yield is not found significant.However,non-linearity has not been observed regarding term.Results are found robust for market adjusted momentum payoff.The study also explores the impact of market state,volatility and business cycles on return of loser and winner portfolio.This study report that returns of the loser portfolios are explained by market components whereas volatility is found to be insignificant.The macroeconomic variables TERM,TERM2 and Yield explain signs of statistical significance at 90% level of significance.Market factor is significantly and positively influencing winner portfolios.Volatility is insignificantly influences the winner returns and same behavior is observed under positive and negative market state.The results show that volatile market forecast low returns on winner stock.Return dispersion used to measure cross-sectional is also found significant at 90% level of significance.The study recommends that investors should devise investment and momentum strategies on the basis of volatility of stocks and business cycle.The tests of this study demonstrate that volatile down markets predict low momentum payoffs.The time series predictability of momentum is asymmetric,which arises from loser stocks.These results jointly present a significant and raise a tough challenge to existing theories on momentum.