Past price changes, trading volume and prediction of portfolio returns

Sanjay Sehgal and Vibhuti Vasishth

Journal of Advances in Management Research, 2015, vol. 12, issue 3, 330-356

Abstract: Purpose - – The purpose of this paper is to evaluate the profitability of investment strategies based on past price changes and trading volumes. Design/methodology/approach - – Data are employed from January 1998 to December 2011 for select emerging markets. Portfolios are formed on the basis of past information on prices and/or volumes. Unrestricted and risk adjusted returns for sample portfolios are analyzed. The risk models employed in study are Capital Asset Pricing Model (CAPM), Fama-French (F-F) Model and Fama-French augmented models. Findings - – Price momentum patterns are observed for Brazil, India, South Africa and South Korea, while there are reversals in Indonesia and China. Low-volume stocks outperform high-volume stocks for all sample countries except China. Further, volume and price based bivariate strategies do a better job than univariate strategies in case of India, South Africa and South Korea. The past price and volume patterns in stock returns are not fully explained by CAPM as well as the F-F Model. Price and volume momentum factors do play a role in explaining some of these return patterns. Finally, the unexplained returns seem to be an outcome of investor under or overreaction to past information. The sources of price and volume momentum seem to be partly risk based and partly behavioral. Originality/value - – The study analyzes combined role of price and volume in portfolio formation with post holding analysis. The work is useful for global portfolio managers, policy makers, market regulators and the academic community. The study contributes to asset pricing and behavioral finance literature for emerging markets.

Keywords: Behavioural finance; Asset pricing; Investment strategies; Price momentum; Volume momentum (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jamrpp:v:12:y:2015:i:3:p:330-356

DOI: 10.1108/JAMR-10-2014-0056

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