An Investigation Into Momentum Anomaly:

Abstract

This study set out to investigate further evidence on momentum anomaly at the NSE. Part of the study involved decomposing momentum profits based on firm size and testing for the influence of FF three-factor model. At the beginning of each month t the stocks are ranked in ascending order based on their cumulated returns over the previous J months where J is 3, 6, 9 or 12. Based on the rankings, the stocks are assigned to one of three terciles. The portfolios are then held for the next K months, where K is 3, 6, 9 or 12. t-statistics are then used to test the hypothesis. The six month formation strategy outperforms all other strategies irrespective of the holding period. All the zero cost strategies yield positive returns which are statistically significant except the 12-month/12-month strategy. The best performing strategy is the 6month/3-month which gives an average monthly return of 1.62 %. The 6-month/6-month strategy is used to decompose momentum profits based on firm size. The smallest firms generate the lowest abnormal returns, while the largest firms generate lower abnormal returns compared to medium firms. Time series regressions show that the FF three-factor model does not influence momentum profits.