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Analysis on the Return of Weekly Momentum Strategy with Lag Prior to Portfolio Holding Period

Author ZhangLin
Tutor WangZhiQiang
School Dongbei University of Finance
Course Financial Engineering
Keywords momentum strategy interval Fama-French three factor model
Type Master's thesis
Year 2013
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Momentum, is the tendency of an object in motion to stay in motion. In stock market, momentum effect is that rising stocks tend to keep rising, while falling stocks tend to keep falling. That is, stock prices have the trend of continuing the original direction of movement. In Chinese stock market, a lot of investors tend to take "random index (KDJ)" and other technical analysis methods for short-term investment.After the discovery of3to12months momentum effect in American stock market by Jegadeesh and Titman(1993), many academic studies are carried out for extensive and deep research in momentum effect, these studies draw a number of important conclusions. The vast majority of these researches has devoted significant attention to the length of the test period over which past performance is evaluated when constructing momentum portfolios.Almost no attention has been devoted, however, to how long before portfolio formation this test period should end.Based on the American stock data, Novy-Marx(2008,2011) tested the influence of the length of interval between the formation period and the holding period on the returns of momentum strategies. They found that the stocks that have risen the most over the past6months, but performed poorly over the first half of the preceding year, significantly under-perform those stocks that have fallen the most over the past6months but performed strongly over the first half of the preceding year. That is, intermediate horizon past performance, measured over the period from12to7months prior, seems to better predict average returns than does recent past performance. The results of this study make a very valuable reference to people in construct momentum strategies.Many research results of the existence of momentum effect in Chinese stock market show that there is no monthly momentum effect but weekly momentum effect, therefore, this paper based on2006-2011weekly earnings data of Chinese stocks, test the effect of the length of the interval between formation and the holding period on the returns of momentum strategies. As a result, momentum strategies without interval between formation and holding period exhibit significant negative returns, and significant positive returns for one or two weeks interval. But when the interval is larger than2weeks, the gains of momentum strategies are no more significant.In the very beginning, this paper presents the monthly momentum and weekly momentum term structure of Chinese stock market, and discovery that, for monthly momentum only five months interval strategy has significant positive return, the rest are not significant nor significant negative, therefore we can’t conclude that the length of the interval between formation and holding period have a significant effect on the monthly momentum strategies; while in the weekly momentum term structure, momentum strategies with no interval, interval of1week and2weeks have significant returns. Therefore, this paper would not discuss the impact of interval duration on monthly momentum strategies returns, we focus on the influence of the length of intervals on weekly momentum strategies returns.To follow with, we use three parametric methods and the traditional J/K strategy method to analyze the momentum strategies with different intervals, then test the result with double-sort portfolio, at last, we investigate the effects of firm size on momentum strategies with different intervals. We come to these conclusions:(1)strategies with1or2weeks lag between formation and holding period will obtain much higher returns.(2) Even excluding the impact of ro on r1, MOM1|0still get significant positive return, but exclude the impact of r1on ro, the conditional momentum MOM0|1can not get significant return.(3) Large-cap stock have greater momentum return.(4) excluding the impact of ro on r1, the returns of double-sorted portfolios increased with r1, indicating that momentum strategies with1week interval can get positive returns. But exclude the influence of r1on ro, double-sorted portfolios decreases with ro, indicating that no interval momentum strategies will get negative returns.In addition, we find out that the inverse return of no interval strategies become more significant after2003, and increase by year. While the one and two weeks interval strategies are not significant only in period of2002-2003and2008-2010. Therefore, we deem that the strategies with one or two weeks interval is more steady than the ones with on interval.To sum up, for Chinese stock market,compared to free-interval momentum strategies, strategies with1or2weeks interval between formation and holding period will obtain much higher momentum returns, while inverse strategies without interval can obtain much higher reverse returns. Hope this conclusion can help investors get higher return by using momentum strategy.

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