Testing the Growth Option Theory: The Profitability of Enhanced Momentum Strategies in Australia

24 Pages Posted: 21 Apr 2012

See all articles by Gil Aharoni

Gil Aharoni

University of Melbourne; Financial Research Network (FIRN)

Tuan Quoc Ho

affiliation not provided to SSRN

Qi Zeng

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Date Written: June 2012

Abstract

Recent literature relates growth option theory to various return regularities. Sagi and Seasholes (2007) (S&S) develop a model that explains momentum profitability using growth option theory. We test the model’s predictions in the Australian market by examining three momentum strategies. Two of these strategies examine the profitability of momentum strategies conditioned on stocks characteristics, whereas the third conditions on previous market returns. Our results are largely supportive of the S&S model. As predicted by S&S, the two strategies that use firm‐specific characteristics yield a higher profit than a simple momentum strategy. The third strategy that conditions on the previous market return also leads to differences in momentum profitability between bull and bear markets, but these differences are small and largely insignificant.

Keywords: Asset pricing, Enhanced momentum strategies, Growth options, International momentum effect

JEL Classification: G12, G14

Suggested Citation

Aharoni, Gil and Ho, Tuan Quoc and Zeng, Qi, Testing the Growth Option Theory: The Profitability of Enhanced Momentum Strategies in Australia (June 2012). Accounting & Finance, Vol. 52, Issue 2, pp. 267-290, 2012. Available at SSRN: https://ssrn.com/abstract=2042888 or http://dx.doi.org/10.1111/j.1467-629X.2011.00401.x

Gil Aharoni (Contact Author)

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Tuan Quoc Ho

affiliation not provided to SSRN

Qi Zeng

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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