The aim of this paper is to test whether the momentum effect is still exist in UK financial market and the test for the effect and profitability of momentum strategies in paper is based on the methodology used by Jegadeesh and Titman (1993) and DeBondt and Thaler (1985, 1987). While, this study assess the profitability of JxK trading strategies, where the securities are assigned to portfolios according to a ranking in period t based on the previous J months ‘returns. In order to avoid biases, we skip one trading day between holding period and formation period for all investment strategies.
When we download the ten years monthly stock price form the FTSE100 during the period 2005 to 2015 from yahoo finance, we calculate the stock returns following the time series. We have four formation periods and holding periods, each equal to 3, 6, 9, 12months, so totally we have 16 strategies. Firstly, calculate returns for a set of stocks for the setting period (3, 6, 9, 12 months), then rank the returns from highest to lowest, now stocks are ranked in ascending order on the basis of their returns in the past J month, here, J refer to the formation period which set to 3,6,9 and 12 months. Secondly, sorting these returns and choose the top batch stocks labelled as winners’ portfolio and bottom batch as losers’ portfolio, the stocks are equally-weighted at the …show more content…
When R ̅winner- R ̅loser > 0, which refer to past winners outperform past losers, it suggest that the momentum strategy is profitable, if it also significantly different from zero, we can reject the weak form of EMH, here we assuming transaction cost have no effect on the R ̅Winner-loser . Here, we need a formula to test the significance of returns on these strategies which refer
When we download the ten years monthly stock price form the FTSE100 during the period 2005 to 2015 from yahoo finance, we calculate the stock returns following the time series. We have four formation periods and holding periods, each equal to 3, 6, 9, 12months, so totally we have 16 strategies. Firstly, calculate returns for a set of stocks for the setting period (3, 6, 9, 12 months), then rank the returns from highest to lowest, now stocks are ranked in ascending order on the basis of their returns in the past J month, here, J refer to the formation period which set to 3,6,9 and 12 months. Secondly, sorting these returns and choose the top batch stocks labelled as winners’ portfolio and bottom batch as losers’ portfolio, the stocks are equally-weighted at the …show more content…
When R ̅winner- R ̅loser > 0, which refer to past winners outperform past losers, it suggest that the momentum strategy is profitable, if it also significantly different from zero, we can reject the weak form of EMH, here we assuming transaction cost have no effect on the R ̅Winner-loser . Here, we need a formula to test the significance of returns on these strategies which refer