Investor attention,firm-specific characteristic,and momentum: A case of the Korean stock market

This study examines the sources of negative momentum profits by combining investor attention and the properties of common and firm-specific factors. We choose the Korean stock market as a good case to characterize the negative momentum profits identified in Asia. In both portfolio and stock analyses, a method is devised to generate return data involving the property of each common and firm-specific factor within stock groups by investor attention. This study found significant negative momentum profits within the stock group with high investor attention. This momentum effect is highly dependent on the reversed performance of the past loser portfolio, not the continued performance of the past winner portfolio, and this reversal is strongly attributable to the properties of firm-specific factors, and not those of common factors. These results are robustly consistent regardless of changes in empirical design and the consideration of influence factors, market dynamics, and other stock markets.     

Is the Mean Return of Hotel Real Estate Stocks Apt to Overreact to Past Performance?

This study examines the return patterns of hotel real estate stocks in the U.S. during the period from 1990 to 2007.We find that the magnitude and persistence of future mean returns of hotel real estate stocks can be predicted based on past returns, past earnings surprise, trading volume, firm size, and holding period. The empirical evidence found from this paper confirms that short-horizon contrarian profits can be partially explained by the lead-lag effects, while in the intermediate-term price momentum profits and long-term contrarian profits can be partially attributed to the firms’ overreaction to past price changes. Our results support the contrarian/overreaction hypothesis, and they are inconsistent with the Fama-French risk-based hypothesis or the underreaction hypothesis. The study also confirms the earning underreaction hypothesis and finds the high volume stocks tend to earn high momentum profits in the intermediate-term. The study finds that the earning momentum effect for hotel stocks is more short-lived and smaller in magnitude than the market average. Price momentum portfolios (or contrarian portfolios) of big hotel firms underperform small hotel firms and the hotel price momentum portfolio (or contrarian portfolios) significantly underperform the overall market over the intermediate-term (or the long-term). These findings imply that the U.S. hotel industry, particularly the big hotel firms, have experienced relatively conservative growth in the sample period. It suggests that a conservative hotel growth strategy accompanied by an internal-oriented financing policy is proper in a period of prosperity.     

Dividends and price momentum

Stock market evidence shows that momentum profits are lower among dividend-paying firms than their non-paying counterparts due to differences in losers’ returns. Additionally, dividend maintenance is associated with higher returns for losers but not for winners. Finally, buying winners that increased their dividends and shorting losers that decreased their dividends enhances momentum profits. Consistent with the evidence, the behavioral models suggest that investors underreact to the losers’ positive dividend-maintaining news, reducing their return momentum and shrinking the payers’ momentum profit. Also, underreaction to positive news from winners’ dividend-increasing announcements as well as to negative news from losers’ dividend-decreasing announcements explains the higher momentum profits for strategies based on these stocks. The results do not appear consistent with risk-based explanations.     

Islamic investing

Using a large international sample of 35 developed and emerging markets, we analyze whether Islamic indices exhibit a different performance to conventional benchmarks. While there is no compelling evidence of performance differences in robust Sharpe ratio tests and after controlling for market risk, we find a significantly positive four-factor alpha for the aggregate developed markets region. This outperformance stems, however, mainly from the U.S. and is largely attributable to the exclusion of financial stocks in Sharia-screened portfolios. As the extensive downturn of financials is related to the recent financial crisis, we do not argue that this outperformance will continue over time. The style analysis reveals that Islamic indices invest mainly in growth stocks and positive momentum stocks. This, for a passive portfolio intriguing result can, however, be explained by the strong sector allocation towards energy firms and their strong momentum characteristic during the sample period.     

Momentum and Foreign Investors: Evidence from the Korean Stock Market

Abstract:

We examine whether the price impact of foreign investors on the Korean stock market from December 2000 to February 2007 generated a momentum phenomenon. In our empirical results, foreigners seem to have exerted a significantly positive impact on prices in “up” markets (periods of positive stock returns), but have had little impact on prices in “down” markets (periods of negative returns). We document that the impact of foreigners’ trades is concentrated in large companies. Most importantly, when the market is in the up state, the returns of stocks of large companies that were positively affected by foreign investors in the previous six-month period continue to increase in the subsequent six-month period. As a result, the subsequent six-month return on a past “winner” stock portfolio is significantly higher than that on a past “loser” stock portfolio. This brings to mind a momentum phenomenon that has been reported not to exist in the Korean stock market.     

Is momentum really momentum?

Momentum is primarily driven by firms' performance 12 to seven months prior to portfolio formation, not by a tendency of rising and falling stocks to keep rising and falling. Strategies based on recent past performance generate positive returns but are less profitable than those based on intermediate horizon past performance, especially among the largest, most liquid stocks. These facts are not particular to the momentum observed in the cross section of US equities. Similar results hold for momentum strategies trading international equity indices, commodities, and currencies.     

Is default risk the hidden factor in momentum returns? Some empirical results

This paper analyzes the role of default risk in the momentum effect focusing on data from four developed European stock markets (France, Germany, Spain and the United Kingdom). Using a market‐based measure of default risk, we show that it is not the hidden factor behind this effect. While the loser portfolio is characterized by high default risk, small size, high book‐to‐market and illiquidity, characterization of the winner portfolio is somewhat more complex. Given that the momentum strategy is the return differential between the winners and the losers, factors such as the stock market cycle or the evolution of momentum portfolios against their reference point make momentum profits difficult to forecast.     

Slow diffusion of information and price momentum in stocks: Evidence from options markets

This paper investigates the source of price momentum in the stock market using information from options markets. We provide direct evidence of the gradual information diffusion model in Hong and Stein (1999): momentum profits are larger for stocks whose information diffuses slowly into the stock market. We exploit the options markets to identify stocks with slow information diffusion speed. As informed traders trade options to realize the information that has not been fully incorporated in the stock price, we are able to enhance the momentum strategy by selecting winner/loser stocks with high growth/large drop in call option implied volatility. Our empirical strategy generates a risk-adjusted alpha of 1.8% per month over the 1996–2011 period, during which the simple momentum strategy fails to perform. The results are robust to the impact of earnings announcement, transaction costs, industry concentration, and choice of options’ moneyness and time-to-maturity. Finally, our finding is not driven by existing stock- or option-related characteristics that are known to improve momentum.     

ADRs under momentum and contrarian strategies

Given the recent growth in the American Depositary Receipts (ADRs) and the current general climate of globalization in world equity exchanges, this paper investigates the ADRs as a distinct group of stocks within the framework of momentum and contrarian strategies. It considers the entire body of the level III ADRs from January 1982 to December 2005 and provides an analysis of their performance under various momentum and contrarian strategies. The methodology that is employed draws upon and is an extension of Lo and Mackinlay [Lo, Andrew W. and A. Craig MacKinlay, 1990. When are contrarian profits due to stock market overreaction? Review of Financial Studies, v3 (2), 175–206.] and Jegadeesh and Titman [Jegadeesh, Narasimhan and Sheridan Titman, 2001. Profitability of momentum strategies: An evaluation of alternative explanations, Journal of Finance, v56 (2, Apr), 699–720.]. The results indicate considerable support for the presence of the momentum and contrarian strategies in the ADRs market. The profitability of such strategies obviously runs counter to the efficient market hypothesis. These issues are elaborated upon and suggestions for further research are offered.     

Interaction of size,book‐to‐market and momentum effects in Australia

This study seeks to disentangle the effects of size, book‐to‐market and momentum on returns. Initial results show that each characteristic has a role in explaining returns, but that there is interaction between size and momentum, as well as between size and book‐to‐market. Three key findings emerge. First, the size premium is the strongest, particularly in the loser portfolios. Second, the value premium is generally limited to the smallest portfolios. Third, the momentum premium is evident for the large‐ and middle‐sized portfolios, but loser stocks significantly outperform winner stocks in the smallest size portfolio. When these interactions are controlled with multivariate regression, we find a significant negative average relation between size and returns, a significant positive average relation between book‐to‐market and returns, and a significant positive average relation between momentum and returns.     

Testing the growth option theory: the profitability of enhanced momentum strategies in Australia

Recent literature relates growth option theory to various return regularities. Sagi and Seasholes (2007) (S&S) develop a model that explains momentum profitability using growth option theory. We test the model’s predictions in the Australian market by examining three momentum strategies. Two of these strategies examine the profitability of momentum strategies conditioned on stocks characteristics, whereas the third conditions on previous market returns. Our results are largely supportive of the S&S model. As predicted by S&S, the two strategies that use firm‐specific characteristics yield a higher profit than a simple momentum strategy. The third strategy that conditions on the previous market return also leads to differences in momentum profitability between bull and bear markets, but these differences are small and largely insignificant.     

Residual momentum

Conventional momentum strategies exhibit substantial time-varying exposures to the Fama and French factors. We show that these exposures can be reduced by ranking stocks on residual stock returns instead of total returns. As a consequence, residual momentum earns risk-adjusted profits that are about twice as large as those associated with total return momentum; is more consistent over time; and less concentrated in the extremes of the cross-section of stocks. Our results are inconsistent with the notion that the momentum phenomenon can be attributed to a priced risk factor or market microstructure effects.     

Earnings and price momentum

This paper examines whether earnings momentum and price momentum are related. Both in time-series as well as in cross-sectional asset pricing tests, we find that price momentum is captured by the systematic component of earnings momentum. The predictive power of past returns is subsumed by a zero-investment portfolio that is long on stocks with high earnings surprises and short on stocks with low earnings surprises. Further, returns to the earnings-based zero-investment portfolio are significantly related to future macroeconomic activities, including growth in GDP, industrial production, consumption, labor income, inflation, and T-bill returns.     

The 52-week high momentum strategy in international stock markets

We study the 52-week high momentum strategy in international stock markets proposed by George and Hwang [George, T., Hwang, C.Y., 2004. The 52-week high and momentum investing. Journal of Finance 59, 2145-2176.]. This strategy produces profits in 18 of the 20 markets studied, and the profits are significant in 10 markets. The 52-week high momentum profits exist independently from the Jegadeesh and Titman [Jegadeesh, N., Titman, S., 1993. Returns to buying winners and selling losers: implications for market efficiency. Journal of Finance 48, 65-91.] individual stock and Moskowitz and Grinblatt [Moskowitz, T.J., Grinblatt, M., 1999. Do industries explain momentum? Journal of Finance 54, 1249-1290] industry momentum strategies. These profits do not show reversals in the long run. We find that the 52-week high is a better predictor of future returns than macroeconomic risk factors or the acquisition price. The individualism index, a proxy to the level of overconfidence, has no explanatory power to the variations of the 52-week high momentum profits across different markets. However, the profits are no longer significant in most markets once transaction costs are taken into account.     

The fundamentals of momentum investing: European evidence on understanding momentum through fundamentals

This paper tests Ahmed and Safdar's noise‐related fundamentals‐based explanation for the momentum premium in European equity markets. Consistent with the view that past price changes may be partially driven by noise, the future return behaviour of winners and losers is significantly dependent upon the degree to which past price performance is consistent with fundamentals. European momentum profits are concentrated among those firms where past price performance is congruent with fundamentals, but absent among those firms where past price performance is incongruent with fundamentals. The significantly different momentum premiums on congruent and incongruent fundamentals‐momentum strategies are attributable to the exploitation of existing mispricing among momentum stocks that can be ex ante identified using firm fundamentals.     

A multilateral approach to examining the comovements among major world equity markets

This study investigates the comovement in stock indices among major developed markets, where Morgan Stanley Capital International (MSCI) indices are employed for the purposes of the study. We employ a model that accommodates multilateral international impacts on equity index movements. The empirical results reveal the existence of significant international transmission effects among these major world markets, both in terms of returns and volatility, and mostly in a positive direction. The U.S. market, as expected, is the leading market in the sense that it has the most pervasive and significant impact on all markets across continents. However, the U.S. market exhibits a different relationship with European markets from that with Asia-Pacific markets. The evidence also suggests that strong regional transmission effects exist. A further investigation using the extended model reveals that the linkages between U.S. and European markets are driven by positive global common forces and by negative international competitive effects. On the other hand, the U.S. and Asian markets are linked through positive global common forces and positive international contagion effects. The United States, Canada, and the U.K. are the three markets that still demonstrate contagion influence over countries outside its own region. The Asia-Pacific markets are more susceptible to contagion effects. Finally, it is interesting to find that Japanese market performance became more contagious toward other markets during the Asian financial crisis period.     

Sources of Fluctuations in Islamic,U.S., EU,and Asia Equity Markets: The Roles of Economic Uncertainty,Interest Rates,and Stock Indexes

This article analyzes the economic and financial sources of fluctuations among the U.S. federal funds rates, the U.S. economic policy uncertainty, and the indices of the U.S., European, Asian, and Islamic stock markets. The impulse response analysis shows that the U.S. economic policy uncertainty shocks have significant and negative effects unanimously on the U.S., European, Asian, and Islamic stock markets. A contractionary monetary policy shock, in terms of a higher federal funds rate, has also a statistically significant and negative effect on all of the stock markets. The variance decomposition results indicate that the Islamic stock index is mainly affected by the U.S. stock index shock, thus negating its dichotomy hypothesis. The U.S. economic uncertainty shock explains an important portion of fluctuations for all four stock indices. The degree of synchronization between the EU stock market and other markets has weakened after the U.S. financial crisis.     

Industry momentum strategies and autocorrelations in stock returns

In this study, we examine the sources of profits to momentum strategies of buying past winner industry portfolios and selling short past loser industry portfolios. We decompose the profit into (1) own-autocovariances in industry portfolio returns, (2) cross-autocovariances among industry portfolio returns, and (3) cross-sectional dispersion in mean portfolio returns. Our empirical results show that the industry momentum effect is mainly driven by the own-autocorrelation in industry portfolio returns, not by return cross-autocorrelations or by cross-sectional differences in mean returns. Indeed, the industry momentum strategy generates statistically significant profits only when own-autocorrelations are positive and statistically significant. The evidence is consistent with several behavioral models (e.g. Journal of Financial Economics 45 (1998) 307; Journal of Finance 53 (1998) 1839; Journal of Finance 54 (1999) 2143) that suggest positive own-autocorrelations in stock returns and hence the price momentum.     

The risk adjusted uncovered equity parity

This paper explores the risk adjusted uncovered equity parity model to investigate a degree of market integration for four Asian emerging markets relative to the U.S., Japan and the U.K. from January 1994 to July 2008. The uncovered equity parity is revised to take into account of market risk in a framework of a portfolio rebalancing model. Evidence was found to strongly support our hypotheses; Market risk is significant in international capital flows between the Asian emerging markets and the developed economies, and it can help explain the failure of a traditional uncovered equity (or interest) parity model. The relationship between returns and an appreciation of the exchange rate are divided between the Asian emerging markets and the developed economies, depending on the direction of capital flows.     

Risk adjustment and momentum sources

We show that the conventional procedure of risk adjustment by running full-sample time-series Fama-French three-factor regressions is not appropriate for momentum portfolios because the procedure fails to allow for the systematic dynamics of momentum portfolio factor loadings. We propose a simple procedure to adjust risks associated with the Fama-French three factors for momentum portfolios. Using our proposed method, the Fama-French three factors can explain approximately 40% of momentum profits generated by individual stocks and nearly all of momentum returns from style portfolios.