Momentum investing and the GFC: The case of the S&P/ASX100

Bruce J Vanstone, Tobias Hahn

Research output: Chapter in Book/Report/Conference proceedingConference contributionResearchpeer-review

Abstract

This paper aims to contribute to the literature on momentum by documenting the performance of a variety of momentum strategies in the S&P/ASX100 index, and subsequently investigating whether the performance of these momentum strategies was affected by the Global Financial Crisis (GFC). Prior momentum studies in Australian equity markets have produced mixed results, describing performance ranging from startling out-performance to no effect. Firstly, we document returns to momentum strategies with varying formation and holding periods in the S&P/ASX100. We focus on practical strategies by measuring momentum in the S&P/ASX100. Many researchers test momentum strategies within artificially determined market strata created by allocating stocks to bands based on market capitalization. There is a clear dependency between selecting stocks on the basis of their market capitalization and then measuring momentum based on those stocks returns, as the market capitalization is a function of the share price that gives rise to the returns that momentum is measuring. We suggest that within Australia, a better alternative is to test the performance of momentum strategies within the constituents of specific S&P ASX indices. Membership in these indices is not solely dependent on market capitalization but also on liquidity, domicile and the S&P Membership Committee goal of minimizing turnover. This focus on liquidity in combination with market capitalization helps ensure that the implementation of momentum strategies within index constituents is feasible. Prior papers which test within strata of market capitalization alone do not carry this assurance. Secondly, we find that the performance of momentum strategies was affected during the GFC. Winner portfolios experienced a sharp drop in returns, and Loser portfolios performed very well. The combination WML (Winner Minus Loser) portfolios suffered during the GFC, but the effect was not persistent. Post-GFC performance of WML portfolios is not distinguishable from pre-GFC performance. We conclude that there has not been a structural break within the momentum phenomena; rather there was a brief suspension during the worst of the GFC.
Original languageEnglish
Title of host publicationProceedings of the 26th Australasian Finance and Banking Conference
EditorsF Moshirian
Place of PublicationSydney
PublisherUniversity of New South Wales
Number of pages20
ISBN (Print)9780987312754
DOIs
Publication statusPublished - 2013
Event26th Australasian Finance and Banking Conference 2013 - Sydney, Sydney, Australia
Duration: 17 Dec 201319 Dec 2013

Conference

Conference26th Australasian Finance and Banking Conference 2013
CountryAustralia
CitySydney
Period17/12/1319/12/13

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