Does the Momentum Strategy Work Universally? Evidence from the Japanese Stock Market

This paper investigates effectiveness of momentum strategies in the Japanese stock market during the period of 1975 to 1997. The main findings of this research are that momentum strategy portfolios which invest in past three-to-twelve month winners and sell past three-to-twelve month losers lose about 0.5% per month over the subsequent three to twelve months. This means that stock prices in the Japanese stock market reverse rather than continue over a medium-term horizon. The most significant reversal pattern is observed at the first month of portfolio formation and is unique to small stocks. Even with the market risk and size factor controlled, the price reversal is still present.