TY - GEN

T1 - Momentum investing and the GFC: The case of the S&P/ASX100

AU - Vanstone, Bruce J

AU - Hahn, Tobias

N1 - 26th Australasian Finance and Banking Conference 2013 ; Conference date: 17-12-2013 Through 19-12-2013

PY - 2013

Y1 - 2013

N2 - This paper aims to contribute to the literature on momentum by documenting the performance of a variety of momentum strategies in the S&P/ASX100 index, and subsequently investigating whether the performance of these momentum strategies was affected by the Global Financial Crisis (GFC). Prior momentum studies in Australian equity markets have produced mixed results, describing performance ranging from startling out-performance to no effect. Firstly, we document returns to momentum strategies with varying formation and holding periods in the S&P/ASX100. We focus on practical strategies by measuring momentum in the S&P/ASX100. Many researchers test momentum strategies within artificially determined market strata created by allocating stocks to bands based on market capitalization. There is a clear dependency between selecting stocks on the basis of their market capitalization and then measuring momentum based on those stocks returns, as the market capitalization is a function of the share price that gives rise to the returns that momentum is measuring. We suggest that within Australia, a better alternative is to test the performance of momentum strategies within the constituents of specific S&P ASX indices. Membership in these indices is not solely dependent on market capitalization but also on liquidity, domicile and the S&P Membership Committee goal of minimizing turnover. This focus on liquidity in combination with market capitalization helps ensure that the implementation of momentum strategies within index constituents is feasible. Prior papers which test within strata of market capitalization alone do not carry this assurance. Secondly, we find that the performance of momentum strategies was affected during the GFC. Winner portfolios experienced a sharp drop in returns, and Loser portfolios performed very well. The combination WML (Winner Minus Loser) portfolios suffered during the GFC, but the effect was not persistent. Post-GFC performance of WML portfolios is not distinguishable from pre-GFC performance. We conclude that there has not been a structural break within the momentum phenomena; rather there was a brief suspension during the worst of the GFC.

AB - This paper aims to contribute to the literature on momentum by documenting the performance of a variety of momentum strategies in the S&P/ASX100 index, and subsequently investigating whether the performance of these momentum strategies was affected by the Global Financial Crisis (GFC). Prior momentum studies in Australian equity markets have produced mixed results, describing performance ranging from startling out-performance to no effect. Firstly, we document returns to momentum strategies with varying formation and holding periods in the S&P/ASX100. We focus on practical strategies by measuring momentum in the S&P/ASX100. Many researchers test momentum strategies within artificially determined market strata created by allocating stocks to bands based on market capitalization. There is a clear dependency between selecting stocks on the basis of their market capitalization and then measuring momentum based on those stocks returns, as the market capitalization is a function of the share price that gives rise to the returns that momentum is measuring. We suggest that within Australia, a better alternative is to test the performance of momentum strategies within the constituents of specific S&P ASX indices. Membership in these indices is not solely dependent on market capitalization but also on liquidity, domicile and the S&P Membership Committee goal of minimizing turnover. This focus on liquidity in combination with market capitalization helps ensure that the implementation of momentum strategies within index constituents is feasible. Prior papers which test within strata of market capitalization alone do not carry this assurance. Secondly, we find that the performance of momentum strategies was affected during the GFC. Winner portfolios experienced a sharp drop in returns, and Loser portfolios performed very well. The combination WML (Winner Minus Loser) portfolios suffered during the GFC, but the effect was not persistent. Post-GFC performance of WML portfolios is not distinguishable from pre-GFC performance. We conclude that there has not been a structural break within the momentum phenomena; rather there was a brief suspension during the worst of the GFC.

U2 - 10.2139/ssrn.2312114

DO - 10.2139/ssrn.2312114

M3 - Conference contribution

SN - 9780987312754

BT - Proceedings of the 26th Australasian Finance and Banking Conference

A2 - Moshirian, F

PB - Australian School of Business, University of New South Wales

CY - Australia

ER -