In this project, we investigate the profitability of the momentum strategy in the stock markets. The momentum strategy is an investment strategy in which past winners are purchased and past losers are shorted. We have analyzed stocks over the period 1999 – 2007 using the method first employed by Jegadeesh and Titman (1993). The outcomes suggest that momentum investing is profitable. The key contribution to the profits comes from purchasing winners as the losers generally don’t contribute at all to total profits. The gains remain after correcting for transaction costs for longer termed strategies whereas they reduce for the shorter termed ones. In comparison to the market index, purchasing past winners yield a surplus return while short selling of losers makes index investing more profitable. In this project we have also shown that momentum cannot be described by the systematic risk of the individual stocks. The proof in support of a momentum effect offered in this report as well signifies that predictable price patterns could be utilized to make excess returns; this is contrary to the efficient market hypothesis.
What is Momentum Strategy?
2.1 The Efficient Market Hypothesis
2.2 Capital asset pricing model
3 Methodology and data
4.1 Raw returns
4.2 Excess returns
4.3 Market frictions
4.4 Systematic risk
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Source: Uppsala University Library