Can Small Investors Gain from Momentum Trading in India: An Empirical Investigation

Abstract

Momentum strategy proposed by Jegadeesh and Titman (1993) and later improvised by Lee and Swaminathan (2000) through volume augmentation, has long been explored and tested across the world. However, the strong assumptions of zero transaction costs, freely available shorting of stocks, and infinite portfolio size restricted these researches only to academic world, a common investor remained devoid of any benefit from them. This research addressed the practical viability of the momentum strategy, both pure and volume augmented, from a small investors point of view after incorporating all sorts of transaction costs and restrictions. Due to various restrictions and associated costs only long side of the momentum strategy was implemented for all 16 combinations of 3, 6, 9, and 12-month portfolio formation and portfolio holding periods. Returns were adjusted for risk under Fama-French (1993) conditions to arrive at the actual returns added by the strategy. Results prove that in Indian stock market, even after accounting for all sorts of transaction costs and exchange imposed restrictions, the pure momentum strategy can be profitably exploited. Augmenting with volume information can bring about marginal improvements, though only with early momentum strategy. However, this holds good only for short portfolio formation and portfolio holding periods. Indian market does not seem to recognise or reward medium or long-term momentum in stock returns. Whether these momentum returns have their roots in behavioral, risk based or some proportion of both reasons, needs deeper investigation.

Keywords: Momentum Returns, Small Investors, India

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