Improving market timing of time series momentum in the Chinese stock market

ABSTRACT

This paper is the first study to present firm-level evidence that the time-series momentum (TSMOM) strategies with look-back-period k of 10 to 200 days outperform the buy-and-hold strategy (BH) on individual stocks in the Chinese stock market. We document that the optimal k* generating the best performance is different across assets and varies over time. We hence propose a model to predict the asset-specific and time-dependent k*, and examine the performance of the TSMOM strategies with the predicted k*. Our analysis shows that using the time-varying predicted k* substantially improves the predictability of the TSMOM strategies. Our new model and findings shed the light on trading strategy for both academia and applied investment practitioners.     

The momentum effect on Chinese real estate stocks: Evidence from firm performance levels

This paper investigates the momentum effects under different firm performance levels for Chinese real estate stocks using quantile regression with a dummy variable estimator. This paper finds that regardless of the momentum horizon, the momentum effects are positive under high-performing individual stocks, but they are negative under low-performing individual stocks. While prior literature only finds that this asymmetric phenomenon appears under different market states, and the findings on different horizons are inconsistent. Furthermore, this paper finds that the positive (negative) momentum effect under high (low) firm performance levels is stronger than that under bullish (bearish) markets. This implies that superior (inferior) fundamental business performance and bullish (bearish) markets can cause the stock prices to go up (down); however, the effect of the former is stronger than that of the latter. Moreover, this paper finds that the relation between future returns and past turnover ratios is positively correlated under high-performing stocks, but negatively correlated under low-performing stocks. Based on the above findings, this paper regards past turnover ratios as a leading indicator of stock returns and suggests two profitable investment portfolios which are superior to the average returns of real estate stocks.     

Cross-sectional and time-series momentum returns: are Islamic stocks different?

We search for differences in both unconditional and conditional momentum returns of Islamic and Non-Islamic stocks and test implications of competing behavioural theories that aim to explain momentum returns. Our results show that there is no significant difference in momentum returns between Islamic versus Non-Islamic stocks with respect to both cross-sectional (CS) and time-series (TS) momentum strategies even when we condition momentum returns on market dynamics, information uncertainty and idiosyncratic volatility. We also find that the TS strategy outperforms (underperforms) the CS strategy in market continuations (transitions) consistent with the recent evidence in the U.S. market.

Furthermore, we find that CS and TS strategies of both Islamic and Non-Islamic stocks are profitable only when the market continues in the same state consistent with overconfidence driving momentum returns of both Islamic and Non-Islamic stocks.     

Momentum meets value investing in a small European market

In this paper, we investigate two prominent market anomalies documented in the finance literature – the momentum effect and value-growth effect. We conduct an out-of-sample test to the link between these two anomalies recurring to a sample of Portuguese stocks during the period 1988–2015. We find that the momentum of value and growth stocks is significantly different: growth stocks exhibit a much larger momentum than value stocks. A combined value and momentum strategy can generate statistically significant excess annual returns of 10.8%. These findings persist across several holding periods up to a year. Moreover, we show that macroeconomic variables fail to explain value and momentum of individual and combined returns. Collectively, our results contradict market efficiency at the weak form and pose a challenge to existing asset pricing theories.     

The profitability of momentum trading strategies: Empirical evidence from Hong Kong

This paper investigates whether momentum trading strategies are profitable in the Hong Kong stock market, and examines the sources of such profitability. Momentum portfolios are significantly profitable in the intermediate term in Hong Kong, but the profits become insignificant after risk adjustment by the Chordia and Shivakumar (2001) model. The stock-specific return strategy and factor-related return strategy are analyzed to examine which portion of the total return causes stocks to enter extreme portfolios. The Chordia and Shivakumar factor-related return strategy obtains profits with a magnitude that is close to that which is attained by the total return momentum strategy. Additional evidence further supports the view that the Chordia and Shivakumar model captures momentum profits.     

Combining value and momentum: evidence from the Nordic equity market

This is the first article that explores the recently proposed average ranking approach for the value and momentum strategy in the Nordic equity market offering an exceptional experimental environment. Our results indicate that in the Nordic stock markets, the value anomaly offered excess returns in the 1993–2017 sample period only when small stocks were a part of the portfolio, whereas the momentum effect is strong and significant, irrespective of size. Interestingly, our findings also indicate that the negative correlation between value and momentum seems to be driven by growth stocks: Winner stocks that are value stocks generated 1.66% per month on average, whereas winner stocks that are growth stocks exhibit virtually the same average payoff. On the other hand, the spread between value and growth stocks that are loser stocks is on average 0.97% per month.     

中国股市的惯性与反转效应研究

由于中国股市具有政策市的特征,本文在Hong和Stein(1999)模型的基础上,研究政策市背景下的中国股市的惯性与反转效应。我们的主要结果有:中国股市的反转效应相对于惯性效应要更明显一些,并且除了中期惯性与长期反转外,还存在一个超短期的惯性与短期的反转;同时,小公司股票相对大公司股票,惯性运动的趋势较弱,更容易发生反转,成交量大的股票相对于成交量小的股票,惯性运动的趋势较弱,更容易发生反转。最后通过实证分析,在中国股票市场对上述结果进行了检验,实证结果支持了我们的结论。     

动量和反转投资策略在我国股市中的实证分析

本文采用沪深两市1995年前上市的股票作为样本,发现我国股市中也存在明显的动量和反转盈利,且两种效应的强弱与大盘走势相关,当市场为牛市特征时,动量效应明显强于反转效应;当市场为熊市特征时,则反之.经典的CAPM模型无法解释动量和反转盈利的来源,检验表明投资者对不同类型信息的不同反应方式,可以很好解释我国股市中的动量和反转盈利,利用上述检验结果还可以解释我国股市中许多有趣的特征.     

Cross-sectional and time-series momentum returns and market dynamics: evidence from Japan

We test the behavioural theories of overconfidence and underreaction on cross-sectional (CS) and time-series (TS) momentum returns in the Japanese stock markets. Both CS and TS momentum returns are large and significant when the market continues in the same state and turns into losses when the market transitions to another state, consistent with the overconfidence but not the underreaction model. We find that TS conditional momentum returns exceed conditional CS momentum returns because of its active position since TS takes a net long (short) position following UP (DN) markets while CS is a zero-cost strategy irrespective of the market state. Finally, we find no relation between idiosyncratic volatility (IV) and momentum returns which is not supportive of either the overconfidence or underreaction model but implies that IV is not a significant limit to arbitrage in Japan.     

Another look at momentum crashes: momentum in the European Monetary Union

This article studies the profitability of a selection of prominent momentum-based strategies in the European Monetary Union (EMU). In contrast to past examples documenting the lack of profitability of unconditional price momentum in the most recent decade, the current research finds that unconditional price momentum yielded significant positive payoffs. There is evidence of option-like behaviour for strategies based on intermediate past performance. Surprisingly, there is no such evidence for the momentum strategy based on recent past performance.     

Do Institutional and Individual Investors Differ in Their Preference for Financial Skewness?

Employing a unique sample of individual and institutional investors, we conduct experiments to determine investors’ preference for (or indifference to) financial skewness. We present investors with a series of stocks with varying levels of skewness. Using Instant Response Devices, we then collect investors’ choices to hold or sell each stock. Among stocks with equal expected returns, we find strong evidence that the sample investors use a prospect theory utility function rather than a mean-variance expected utility function to decide to sell or hold stocks. In the loss domain, we find that investors are ambivalent about the choice between positively and negatively skewed stocks. However, in the gain domain, we find that both individual and institutional investors prefer negatively skewed stocks—a contrast from previous research suggesting that individuals (and not institutional investors) prefer positive skewness. We also find evidence suggesting that reference points are important in financial decision making.     

Within-series momentum in hockey: No returns for running up the score

Drawing on data from 916 Division 1 men’s college hockey games played during a recent six-year period in the Western Collegiate Hockey Association (WCHA), we find evidence that positive momentum within 458 two-game series does not exist when controlling for team quality. We find that neither victory nor the margin of victory in Game 1 of a two-game series is predictive of the outcome of Game 2. We suggest that loss aversion should be considered in relation to questions of momentum.     

The sources of momentum in international government bond returns

This study aims to offer a new explanation for the momentum effect in international government bonds. Using cross-sectional and time-series tests, we examine a sample of bonds from 22 countries for the years 1980 through 2018. We document significant momentum profits that are not attributable to bond-specific risk factors, such as volatility or credit risk. The global bond momentum is driven by the returns on underlying foreign exchange rates. Controlling for currency movements fully explains the abnormal returns on momentum strategies in international government bonds. The results are robust to many considerations including alternative sorting periods, portfolio construction methods, as well as subperiod and subsample analysis.     

Asset price momentum and monetary policy: time-varying parameter estimation of Taylor Rules

In this article, we consider two new independent variables as inputs to the Taylor Rule. These are the equity and housing momentum variables and are introduced to investigate the potential usefulness of these two variables in guiding the Fed to lean against potential bubbles. Such effectiveness cannot adequately be evaluated if the Taylor Rule estimation follows the standard regression methodology that has been criticized in the literature to be econometrically incorrect. Using a time-varying parameter estimation methodology, we find that equity momentum as an input in the Taylor Rule does not contribute to changes in Fed Funds. However, the housing momentum plays an important role econometrically and can be a useful tool in setting Fed Funds rates.     

A tale of two states: asymmetries in the UK small,value and momentum premiums

This article performs comparative analysis of the asymmetries in size, value and momentum premium and their macroeconomic determinants over the UK economic cycles, using Markov switching approach. We associate Markov switching regime 1 with economic upturn and regime 2 with economic downturn. We find clear evidence of cyclical variations in the three premiums, most notable being that in the size premium, which changes from positive in expansions to negative in recessions. Macroeconomic indicators prompting such cyclicality the most are variables that proxy credit market conditions, namely the interest rates, term structure and credit spread. Overall, macro factors tend to have more significant impact on the three premiums during economic downturns. The results are robust to the choice of information variable used in modelling transition probabilities of the two-stage Markov switching model. We show that exploiting cyclicality in premiums proves particularly profitable for portfolios featuring small cap stocks in recessions at a feasible level of transaction costs.     

Momentum and betting market perceptions of momentum in college football

Past research has demonstrated that bettors believe positive momentum carries over from contest to contest. This article examines whether there is any empirical support for this belief by testing for the presence of across-contest momentum effects in college football. We characterize momentum in multiple fashions and after controlling for between-team heterogeneity find no evidence that systematic relationships exist between the degree of momentum a team enters a contest with and the outcome of that contest. From a wagering market perspective, this indicates that there is no statistically significant advantage to betting on teams perceived to possess positive momentum. Our results also suggest that the combination of the opening betting line set by odds makers and the subsequent market movement of that line does not systematically overreact to teams on streaks.     

Performance of moving average trading strategies over varying stock market conditions: the Finnish evidence

This article examines the profitability of dual moving average crossover (DMAC) trading strategies in the Finnish stock market over the period 1996 to 2012. It contributes to the existing technical analysis literature by comparing for the first time the performance of DMAC trading portfolios of individual stocks to the performance of index trading strategies based on trading on an index that consists of the same stocks. The results show that their relative performance varies over time, whereas previous studies have documented outperformance of index trading strategies over trading strategies of stock portfolios. Moreover, the great majority of 3020 DMAC strategies examined in this article outperform the corresponding buy-and-hold (B and H) strategy for both trading targets (i.e., OMX Helsinki 25 index and individual stocks included in the index) in out-of-sample tests. In addition, the decomposition of the full-sample-period performance into separate bull- and bear-period performance shows clearly that the outperformance of DMAC strategies over B and H strategy is mostly attributable to their better performance during bearish periods.     

The Role of Industry Effects in Simultaneous Reversal and Momentum Patterns in One-Month Stock Returns

When stocks are ranked by returns in one month, the portfolio of loser stocks tends to outperform the portfolio of winner stocks in the subsequent month. Yet industry portfolios tend to display momentum. We develop a model of information diffusion among agents with constrained information processing ability that reconciles these well-documented phenomena. We test whether this model or the overreaction hypothesis is consistent with the data. Additionally, a trading strategy based on the model outperforms strategies based on overreaction and on industry momentum. The strategy produces abnormal returns while controlling for market–risk and the size, book value, January, momentum, and liquidity effects.     

The anatomy of returns from moving average trading rules in the Russian stock market

This paper examines the profitability of index trading strategies that are based on dual moving average crossover (DMAC) rules in the Russian stock market over the 2003–2012 period. It contributes to the existing technical analysis (TA) literature by comparing for the first time in emerging markets the relative performance of individual stocks’ trading portfolios with that of trading strategies for the index that consists of the same stocks (i.e., the most liquid stocks of the Moscow Exchange). The results show that the best trading strategies of the in-sample period can outperform buy-and-hold strategy during the subsequent out-of-sample period, although with low statistical significance. In addition, we document the benefits of using DMAC combinations that are much longer than those employed in previous TA literature. Moreover, the decomposition of the full-sample-period performance into separate bull- and bear-period performances shows that the outperformance of the best past index trading strategies over is mostly attributable to the fact that they managed to stay mostly out of the stock market during a dramatic crash caused by the global financial crisis.