Return‐based investment strategies in the New Zealand stock market: momentum wins

Abeyratna Gunasekarage and Hung Wan Kot

Pacific Accounting Review, 2007, vol. 19, issue 2, 108-124

Abstract: Purpose - The purpose of this paper is to examine the profitability of return‐based investment strategies in the New Zealand stock market; 16 such strategies are examined for the period from January 1995 to December 2004. Design/methodology/approach - The paper shows that, at the end of each month of the sample period, every security is ranked in ascending order using their pastJ‐month formation period cumulative return (J=3, 6, 9 and 12). Then these securities are allocated to three groups; group 1 represents the loser portfolio, while group 3 represents the winner portfolio. Finally, equally weighted average returns of winner and loser portfolios are calculated over the nextK‐month holding period (K=3, 6, 9, and 12). The statistical significance of the returns earned from buying winners and shorting losers is tested in order to determine the profitability of proposed strategies. Findings - The findings in this paper show that a strong momentum effect, rather than a reversal effect, is present in this market. For example, the strategy, which is based on a six‐month portfolio formation period and a six‐month holding period, generates a monthly return of 1.14 per cent. These strategies are most profitable when they are based on formation and holding periods of three‐to‐six months. Further analyses reveal that the profits generated by such investment strategies cannot be explained by either the small firm effect or the January effect. Originality/value - The main implication of this paper shows that buying past winners and selling past losers is profitable in the short to medium run in New Zealand.

Keywords: Momentum; New Zealand; Stock markets (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:parpps:01140580710819889

DOI: 10.1108/01140580710819889

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