Momentum effects : Empirical evidence from Indian equity market

Abstract

More than ten years since Jegadeesh and Titman (1993) first drew attention to the presence of a momentum effect in the US market, the abnormal returns to this type of strategy have still not been explained to the unanimous satisfaction of researchers’. Thus it is one of the main anomalies that continue to challenge the market efficiency hypothesis. The vast body of evidence that testifies to the presence of the momentum effect, both inside and outside the US market, enables us to rule out data mining as the cause, while also revealing that the phenomenonis not exclusive to any one market. It is in this context that this report endeavours to analyze the presence of momentum effects in Indian stock market on which there has not been many documented studies till date. In this report generally applicable non-parametric methods are used in an attempt to sort out the possible sources of momentum in stock markets (behavioural theories or omitted risk factors). Specifically, the results of bootstrap analysis tests are presented for the Indian stock market. The results from the bootstrap analysis are found to depend on the re-sampling method used (with or without replacement). These results have led us to the conclusion that the winner portfolio dominates the loser portfolio in the short term (3 to 12 months), which is not consistent with the general assetpricing models developed for risk-averse investors. This suggests the interest of analysing theories that relax the unbounded rationality assumptions that support many of the classical asset pricing models. Since it is evident from this study that the risk based theories are not alone sufficient to explain the momentum phenomena, hence notable theories from behavioural finance has been used to provide additional degree of explanation that support the existence of momentum strategies.