Short-Term Momentum Patterns in Stock and Sectoral Return: Evidence from India

Abstract:     
Momentum strategies have drawn great attention in investment management literature over last two decades. In this paper we examine three important propositions in Indian context (1) Do momentum profits persist for long time periods?, (2) Can these momentum profits be absorbed by risk models?, and (3) Is stock momentum an outcome of sectoral momentum?.We develop 6-6 and 12-12 investment strategies based on past returns as well as company characteristics. We find momentum profits in Indian context for our prior return portfolios which are stronger for 6-6 compared to 12-12 strategies. These momentum profits are larger for some characteristic sorted portfolios. Risk models such as CAPM and Fama French model significantly fail to capture momentum profits. In fact, winner portfolios generally comprise of large firm and high P/B stocks, thus defying the risk story. Some zero investment momentum based trading strategies do provide significant payoffs. We also observe momentum profits in sectoral returns. A part of stock momentum profits is captured by sectoral factor, thus implying that it may mainly be an outcome of sectoral momentum. Our findings are pertinent for portfolio managers and investment analysts who are continuously in pursuit of trading strategies that provide abnormal returns.

Keywords: Trading strategies, CAPM, Fama French model, Momentum profits, behavioral finance

JEL Classification: C51, C52, G12, G14, G15

working papers series