Kauppakorkeakoulu | Rahoituksen laitos | Rahoitus | 2016
Tutkielman numero: 14734
Momentum in Weekly Returns: Evidence from the German Stock Market
|Otsikko:||Momentum in Weekly Returns: Evidence from the German Stock Market|
|Vuosi:||2016 Kieli: eng|
|Asiasanat:||rahoitus; osakemarkkinat; tuotto; muutos; portfolio; Saksa|
|Avainsanat:||momentum; reversal; weekly returns; anomaly; winner-minus-loser portfolio|
Purpose of the Study
In articles dealing with the momentum effect, more attention has been usually given to monthly and even longer-horizon returns, whereas the weekly returns have been studied less. The well-known phenomenon of the reversal effect of weekly stock returns (see e.g. Lehmann, 1990; Jegadeesh, 1990) has portrayed the extreme weekly returns as if fairly insignificant for a long time. According to Lo and Mackinlay (1999), the separation of short- and long-horizon returns is important, as it is now well-known that the weekly fluctuations stand out in many ways from movements of the longer-horizon returns.
This paper presents a thorough overview of the momentum anomaly in weekly returns in Germany from 1993 till 2015 and tests whether the aforementioned phenomenon allows investors possibilities for abnormal profit generating. The main purpose of this thesis is to answer to the central research question: Based on the research data, has there been evidence of weekly returns' momentum and reversal effects in Germany from 1993 to 2015?
This study covers all of the stocks of the Frankfurt stock exchange that have been trading from December 1993 to August 2015. The cross-listings are excluded, as only the primary quotes are investigated. The stock return data covers the values of total return index from Wednesday to Wednesday, from 29th December 1993 to 26th August 2015. By applying the total return index, the returns of the stocks give a more accurate measure of performance.
In order to evaluate the portfolio's performance in longer than one-week holding periods, the calendar-time method has been employed. This method has been applied by Jegadeesh and Titman (1993) and supported by Fama (1998) as well as Mitchell and Stafford (2000). The benefit of using this method is that it avoids overlapping returns and the strongly positive serial correlation of returns that the overlapping causes.
The study is divided into three different time periods regarding the examination: the pre-financial crisis era, the era following the beginning of the financial crisis and the whole time period from 1993 to 2015. The evidence suggests that the momentum anomaly has existed in the German stock market before the financial crisis of 2007-08. However, the anomaly has disappeared during the financial crisis and the momentum trading strategy hasn't been able to generate abnormal profits. After the beginning of the crisis, the winner-minus-loser portfolio has generated significant losses. In addition, the reversal effect of the weekly returns has been highly significant during the whole period.
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