Project on “Validating Momentum

Strategies in Equity Markets”

Tauqeer Md Iqbal

PGDM F 12034

Batch2012-14

Term 2 Session 1 1

Momentum Strategy

• A trading strategy that buys stocks that have performed well in the past and sell stocks that have performed poorly in the past would be profitable if momentum exists.

• Over a horizon of three to twelve months, past winners on average continue to outperform past losers by about one percent per month, showing that there is “momentum” in stock prices.

Term 2 Session 1 2

Objectives of the study

• Procurement of all the listed companies’ prices.

• Calculation of liquidity.

• Choosing the top 200 liquid stocks

• Ranking these 200 stocks based on momentum

• Formulation of 10 portfolios based on momentum.

• Measure the performance of these portfolios.

• Review the thesis by checking the performance of the portfolios.

Term 2 Session 1 3

Limitation of the study• Momentum strategy cannot be applied for all kind of

investment.

• It can only be applied for short term investment.

• When the market is in descending the strategy doesn’t work

and gives negative return.

• Due to lack of awareness about momentum strategy customers

would react late which results in sub par performance.

Term 2 Session 1 4

Literature review

• Momentum has shown itself to be quite robust across U.S. and foreign equity markets, within industries and countries, and across many different asset classes such as stocks, currencies, commodities, and bonds.

• In 1993, UCLA professors Narasimhan Jegadeesh and Sheridan Titman (1993)found strong evidence, over the 1965–1989 periods, that stock prices trend—at least in the “short-term” of up to two years.

Term 2 Session 1 5

Contd..• Other academics confirmed that momentum is at work in

international equities, emerging markets, industries and sectors, mutual funds, and asset classes. In fact, commodity trading advisors (CTAs) have built a profitable business around trading momentum.

• Empirical studies have shown the momentum effect to be strong, but financial theory hasn’t definitively explained why momentum exists

Term 2 Session 1 6

Research Methodology

Term 2 Session 1 7

• Quantitative research

• Qualitative Research

• Conceptual study

• Hypothesis

• Sampling

• Tools for data collection

• Method of data analysis

Quantitative research

Term 2 Session 1 8

Qualitative Research

• Dealing with only 200 liquid stocks.

• Consideration of top 200 stocks

on the basis of return generated.

Conceptual study

• Ranking of stocks based on momentum.

• Calculation of return over a period of 10 years to see the momentum effect.

• Ranking of stocks based on return.

Term 2 Session 1 9

Hypothesis

• Momentum Stocks outperformed general market index

• Momentum has sticky behaviour.

• Momentum tends to be persistent in the market.

Sampling

• Whole stock market data from National Stock exchange.

• Total of 1600 companies from 2002-2012

Term 2 Session 1 10

Data Collection Tools

• Meta- Stock software for the extraction of the data.

• Purchase of data from Viratech software

Data Analysis Method

• Use of Excel functions like Pivot table, Lookup value

• Return Matrix and Performance matrix

Term 2 Session 1 11

Data AnalysisStep1. Ranking of the stocks on the basis of Total Traded Value.

Term 2 Session 1 12

Step 2. Rearrangement of stocks on the basis of return

Term 2 Session 1 13

Step 3. Creation of portfolios based on stock momentum.

Term 2 Session 1 14

Step 4. Calculation of average return of the top yearly momentum performers.

Term 2 Session 1 15

Step 5. Consolidation of percentage return of Nifty and all the 10 portfolios

Term 2 Session 1 16

• Step 6. Demonstration of capital growth obtained on various momentum strategies.

Term 2 Session 1 17

Performance Return Matrix

Graph showing performances of all the 10 Portfolios and CNX Nifty Index.

Term 2 Session 1 18

SWOT Analysis

Strength: –

• Momentum is a better measure than general market index for short term.

• The strength of momentum strategy is its performance when the market is in upward trend.

Weakness :–

• Portfolio holding period for few months, not tested for a longer investment .

• Higher trading cost due to readjustment of portfolio every month.

Term 2 Session 1 19

Opportunities: –

• Use of this strategy for long term investment.

Threat: –

• Presence of variety of other strategies & portfolios.

• At times it didn’t perform well.

Term 2 Session 1 20

Findings

• Performance of the portfolios are not better than the general Market Index.

• Out of the top 10 Portfolios only 5 of them are performing better than the Market Index.

• The companies performing very well more consistent than the average performers.

• The return on investment by the top performer was much better than Nifty return.

• Amount generated by portfolio-2 is 18.5 lakh and by nifty is 5.5 lakh over 10 year period.

• The difference between the highest and the lowest performer is 16 lakh.

Term 2 Session 1 21

Term 2 Session 1 22

Suggestion & Recommendation

• Portfolios with variable number of stocks

• Portfolio Optimization Method

• Risk Adjusted Momentum Measure

Term 2 Session 1 23

Conclusion

Term 2 Session 1 24

• From the graph it is clear that momentum based portfolios can generate alpha though these portfolios have higher risk and higher return.

• The incremental increase in risk is more than compensated for incremental increase in the return.

• The graph also demonstrates that portfolios based on strong momentum are outperforming the average index after adjusting for the risk. Portfolios based on weak momentum are underperforming and also constitute of higher risk.

Term 2 Session 1 25

Thank You

Term 2 Session 1 26