This thesis studies the momentum effect in the UK stock market. The momentum effect is found to be a persistent yet not fully stable phenomenon in the UK stock market and its dynamics is at least partially conditional on the stability of the stock market. When the stock market is stable, momentum trading strategies tend to have rather reliable and good performances whereas when the stock market is in turmoil, momentum trading strategies tend to suffer losses in the near future. We construct a threshold regression model to analyse this relationship between the momentum effect and the stock market stability. We propose that there are two regimes in the short run for shares that have had extreme past performances, the momentum and the reversal regime, and that the switch from one regime to the other is governed by the stock market volatility. Our estimation results confirm this significant role of the stock market volatility. Moreover, the stock market volatility has a negative impact on a momentum trading strategy’s return in both regimes in most cases. Apart from the stock market volatility, we also find that a momentum portfolio’s ranking period return has a significant inverse relationship with its holding period return in the momentum regime, i.e., the magnitude of the momentum effect during its holding period. This negative relationship suggests that the reversal can occur in the short term even in the momentum regime when the ranking period return is sufficiently large. A new type of trading strategies is designed to take advantage of the predictability of the momentum effect dynamics, in particular, the switch between the momentum and the reversal, and our results show that they outperform momentum trading strategies with higher returns and lower risks. Indeed, following the indication of the threshold regression model, these new trading strategies can exploit not only the momentum effect but also the contrarian effect. More importantly, they are able to generate economically significant profits net of transaction costs even when momentum trading strategies fail to do so. The predictability of the dynamics of the momentum effect and the superior performance of our new trading strategies create an even bigger anomaly than the momentum effect itself in the stock market.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:655936 |
| Date | January 2014 |
| Creators | Cao, Jia |
| Publisher | Cardiff University |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Source | http://orca.cf.ac.uk/74236/ |
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