Momentum strategy and Bombay stock Exchange

Polak Petr and Ejaz Abdullah
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Polak Petr: Universiti Brunei Darussalam
Ejaz Abdullah: Swansea University

Sovremennaa ekonomika: problemy, tendencii, perspektivy Современная экономика: проблемы, тенденции, перспективы, 2012, issue 7, 1-21

Abstract: Short term momentum effect claims that recent past winners tend to outperform the market whereas recent past losers tend to underperform the market. Therefore by definition it challenges the efficient market hypothesis, which is of the view that future returns cannot be predicted by using past returns. This study examines whether short term momentum effect challenges the efficient market hypothesis or not. Momentum effect has been found in almost all the stock exchanges in the world and documented in the financial literature by many well-known scholars. For this purpose, Bombay Stock Exchange (BSE) has been chosen and stock prices of BSE 100 index have been downloaded for the period starting from 24 June, 2006 and ending on 24 June, 2011 to perform momentum calculations. BSE has been selected because of its rapidly growing nature. Many leading articles have mentioned Bombay Stock Exchange as one of the fastest emerging capital stock market in the world. Short term momentum anomaly has been found in Bombay Stock Exchange. Price momentum strategy gives abnormal returns, if implemented in BSE. Average monthly return from BSE is 12.05% which is higher than many leading stock markets of the world for instance NYSE, AMEX, and LSE etc. It is also noticed that winners are outperforming the losers. The above findings are in line with the findings of existing literature. Trading volume based momentum strategies only work when high trading volume and low trading volume based strategies will be used in combination with each other. The notion that “BSE is an emerging market” has also been tested. Returns of momentum strategy from Bombay Stock Exchange and Karachi Stock Exchange have been compared and found that BSE gives more returns than KSE. It has been confirmed from this finding that BSE is the emerging stock market in the region.

Date: 2012
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