Short‐term momentum patterns in stock and sectoral returns: evidence from India

Sanjay Sehgal and Sakshi Jain

Journal of Advances in Management Research, 2011, vol. 8, issue 1, 99-122

Abstract: Purpose - The purpose of this paper is to evaluate if there are any momentum patterns in stock and sectoral returns and if they can be explained by the risk factors. Design/methodology/approach - The methodology involves portfolio generation based on company characteristics and short‐term prior return (six to 12 months). The characteristic‐sorted portfolios are then regressed on risk factors using one‐factor (CAPM) and multi‐factor model (Fama French model and four‐factor model involving three Fama French factors and an additional sectoral momentum factor). Findings - The authors find momentum profits in Indian context for 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 fail to capture momentum profits. In fact, winner portfolios generally comprise large firm and high P/B stocks, thus defying the risk story. Some zero investment momentum‐based trading strategies do provide significant payoffs. The authors 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. Research limitations/implications - The findings are pertinent for portfolio managers and investment analysts who are continuously in pursuit of trading strategies that provide extra normal returns. From an academic point of view, the authors suggest that sectoral factor should be used in the multi‐factor framework for explaining asset returns. Originality/value - The study contributes to the asset pricing and behavioral literature from emerging markets.

Keywords: India; Emerging markets; Stock returns; Portfolio investment; Economic sectors; Profits (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jamrpp:v:8:y:2011:i:1:p:99-122

DOI: 10.1108/09727981111129327

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