An Empirical Analysis of Risk and Size Factors in Momentum Profitability at the Nairobi Stock Exchange

Abstract

A generation ago, the intellectual dominance of the efficient markets hypothesis as the accepted asset pricing paradigm was unchallenged. By the start of the twenty-first century, however, the acceptance of the efficient market hypothesis had become far less universal. Many financial economists and statisticians began to believe that stock prices are at least partially predictable. The profitability of the momentum strategy - the strategy of buying recent winning stocks and shorting recent losing stocks- as first documented in Jegadeesh and Titman (1993) remains one of the anomalies that continue to confound the efficient markets theory. This study sought, first, to establish whether the NSE experienced price momentum in the period covered. Next we tested whether momentum profitability could be explained by, and was compensation for, risk. Finally, we investigated any relationship between price momentum and the well documented size anomaly. We found out that the NSE experienced significant degree of price momentum in the period covered. And that this momentum profitability could not be explained by the three factor risk factors of Fama-French, and that there was no size effect to momentum.