What should investors know about the stability of momentum investing and its riskiness? The case of the Australian Security Exchange

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1 Wha should invesors know abou he sabiliy of momenum invesing and is riskiness? The case of he Ausralian Securiy Exchange Emilios C. Galariois To cie his version: Emilios C. Galariois. Wha should invesors know abou he sabiliy of momenum invesing and is riskiness? The case of he Ausralian Securiy Exchange. Pacific-Basin Finance Journal, Elsevier, 2010, 18 (4), pp < /j.pacfin >. <hal > HAL Id: hal hp://hal-audencia.archives-ouveres.fr/hal Submied on 12 Dec 2013 HAL is a muli-disciplinary open access archive for he deposi and disseminaion of scienific research documens, wheher hey are published or no. The documens may come from eaching and research insiuions in France or abroad, or from public or privae research ceners. L archive ouvere pluridisciplinaire HAL, es desinée au dépô e à la diffusion de documens scienifiques de niveau recherche, publiés ou non, émanan des éablissemens d enseignemen e de recherche français ou érangers, des laboraoires publics ou privés.

2 Wha should invesors know abou he sabiliy of momenum invesing and is riskiness? The case of he Ausralian Securiy Exchange. Emilios C. Galariois* Audencia Nanes School of Managemen, 8 roue de la Jonelière, BP 31222, Nanes Cedex 3, France. ABSTACT This paper invesigaes Ausralian momenum sraegies and heir performance sabiliy separaely employing wo samples a) he S&P/ASX 200 consiuens and b) all marke securiies; for differen ime periods and marke saes. To avoid ransacion inensive sraegies, non-overlapping porfolios are employed. esuls show ha momenum performance is no sample specific and is posiive in all cases, ye a varying magniudes for differen saes and years. The profis are robus o univariae and mulivariae risk consideraions, seasonaliy (which is however presen), and o differen saring monhs. JEL Classificaion: G1 (G10, G11, G14) Keywords: Momenum; Fama-French model; Ausralian Securiy Exchange *Tel.: ; fax: egalariois@audencia.com

3 1. Inroducion Momenum sraegies ha shor wors performing securiies o ake long posiions on op performing ones have esablished consisen profiabiliy over he shor o medium erm. This is conrary o he exising paradigm in he lieraure, and is suppored by a plehora of sudies a an inernaional level. For recen examples beyond U.S., see Galariois e al. (2007) for he London Sock Exchange, and Griffin e al. (2003) for all coninens. Momenum profiabiliy, classified as a major unresolved puzzle by Chan e al. (1996), remains so nearly wo decades afer Jegadeesh and Timan s (1993) seminal paper. More specifically, he lieraure is shor of an unambiguous raionalisaion of he profiabiliy or of evidence ha could provide a furher se of condiions for fuure momenum performance (Swinkels, 2004). This solicis new evidence on more markes no only o allow for comparisons wih exising ones, bu because as Demir e al. (2004) sugges, universal elemens of momenum in differen markes could poenially suppor he inclusion of he momenum facor in asse pricing models (Carhar, 1997). The momenum raionalisaion dialecic has recenly focused around mulivariae risk proposiions, such as he one by Fama and French (1993, 1996), ye, o he bes of my knowledge here is shorage of evidence on his model for momenum in Ausralia. This marke offers ferile research ground for a plehora of oher reasons, he mos imporan of which is ha Ausralian momenum sraegies have no been exensively researched, while exising evidence is conradicory. For example, Demir e al. (2004) and Durand e al. (2006a) repor dramaically differen resuls despie a subsanial sample overlap in heir sudies, possibly due o mehodological differences and/or ime-dependan momenum performance in Ausralia. In addiion, recen momenum evidence by Beman e al. (2009) can be sample specific if one considers he evidence of Gaun and Grey (2003). More specifically, Beman e al. (2009) use daily Ausralian daa for large socks and resuls for his marke are sensiive o he size of he examined firms due o correlaion properies, as well as o he ime frequencies employed. For example, such characerisics can explain he inconsisency of he findings of Durnad e al. (2006a) and Demir e al. (2007). This paper conribues o he lieraure in several ways. I firs confirms ha he findings of Beman e al. (2009) are robus o differen daa frequencies and periods, using monhly daa o deal wih his poenial mehodological problem. Specifically, inermediaehorizon momenum reurns persis in he mos recen period wih a higher magniude relaive o oher markes, consisen wih Demir e al. (2004). Based on he work of Gaun and Grey (2003), ha reveals posiive (negaive) auocorrelaion for large (small and medium) Ausralian securiies, I conrol for he possibiliy ha he momenum evidence by Hurn and Pavlov (2003) and of Beman e al. (2009) are sample specific. To achieve his, a a laer sage, I consider all Ausralian securiies ha exis beween 2000 and he end of The evidence demonsraes ha despie sensiiviy of winner and loser performance o marke capialisaion, heir combinaion, i.e. he hedge porfolio profiabiliy, is no sample specific. The findings of he wo aforemenioned papers are hus exended for a differen pool of securiies, including an ou of sample period. Moreover, he paper aemps o answer he quesion of wheher risk-based explanaions can accoun for he above profis in boh a univariae and mulivariae conex. The findings show ha consisen wih he exan lieraure, CAPM fails o explain momenum reurns, bu he Fama and French hree facor model offers mixed resuls. For insance, alhough i reduces he number of saisically significan reurns, hese uphold heir economic significance, wih for example reurns of 9.6% per year for he 6X6 momenum sraegy. The paper also examines he sabiliy of momenum performance across differen saes of he world for differen saring periods. These ess and microsrucure consideraions reveal ha alhough he average profiabiliy of 2

4 momenum invesing is posiive and saisically significan, he magniude of he reurns generaed is no sable, while here is some evidence of seasonaliy. Finally, while he exan lieraure employs overlapping porfolios, in an aemp o make he sudy even more relevan o praciioners, I adop he less inensive hence less cosly non-overlapping approach. The resuls should also be of ineres o he invesmen communiy, given he involvemen of insiuional invesors, mainly muual funds and brokerage firms, in momenum rading (Burch and Swaminahan, 2001). For example, he resuls sugges ha alhough i is profiable o inves in all Ausralian socks, i may be opimal for a momenum rader o focus on a few and larger liquid socks. A he same ime, alhough momenum performance is posiive, i is no so in every invesmen year, while he magniude of profis and heir driving forces are sensiive o he marke saes. These are paricularly relevan in he curren world seing as he marke recovers from he curren economic siuaion. The res of he paper is organised as follows. Secion 2 provides a brief review of he relevan lieraure, while secion 3 presens he daa and he esing mehodologies. Secion 4 discusses he resuls and implicaions for differen consideraions and samples, and secion 5 concludes he paper. 2. Brief review of he lieraure Jegadeesh and Timan s (1993) paper on momenum se he benchmark for research and proved o be very influenial in erms of mehodology, wih heir mos represenaive 6X6 sraegy aking cenre sage in conemporary research. The findings of he above paper are upheld by Conrad and Kaul (1998) for a wider range of U.S. sraegies over a longer period ( ), wih evidence of posiive abnormal reurns (excluding he period). More recen papers also sugges posiive and significan momenum rading reurns for he U.S. and an indicaive summary is provided in he lis below, where as can be seen momenum sraegies reurn a saisically and economically significan amoun ranging from above 9% per year o abou 18%. Some seleced research on U.S. momenum Auhor(s) and year of publicaion Momenum (%) -value Sample period Formaion X Holding period Grudny and Marin (2001) 0.86 (2.45) X1 a Jegadeesh and Timan (2001) 1.39 (4.71) X6 Chordia and Shivakumar (2002) 0.73 (2.51) X6 Chordia and Shivakumar (2006) 0.76 (2.48) X6 Liu e al. (2006) 0.77 (4.19) X6 b Avramov e al. (2007) 1.49 (3.48) X6 b achev e al. (2007) 1.30 N/A X6 This lis presens raw momenum-sraegy monhly payoffs documened in recen lieraure. The formaion and holding periods are measured in monhs. The leer a reflecs a one-week delay beween formaion and holding period while he leer b implies a one-monh delay. T-values are in parenheses, while he las one was no available in he original paper. Moivaed by he lack of non U.S. evidence, ouwenhors (1998) explores momenum in an inernaional conex, unveiling monhly excess reurns of 1.16% for inernaionallydiversified porfolios in 11 ou of 12 European markes he invesigaes from 1980 hrough o 3

5 1995. A number of recen papers sugges similar evidence in oher inernaional markes, bu no consisenly especially for developing ones, possibly due o daa qualiy and mehodological dispariies. Alhough comparisons beween developed and developing markes are difficul o perform, Swinkels (2004) suggess ha emerging marke evidence seem o poin in he same direcion as ha of developed markes. For insance, in anoher sudy, ouwenhors (1999) finds ha 6 ou of he 20 developing markes he examines exhibi significan posiive momenum reurns of 0.58% per monh. Har e al. (2005) repor similar resuls wih 6X6 momenum excess reurns ranging from 0.59% o 0.74% per monh. In conras, Griffin e al. (2003) (from he indicaive lis provided below) publicise weak and saisically insignifican emerging marke momenum resuls ha in some cases (China and Pakisan) are negaive, suggesing he need for furher research. Some seleced research on Inernaional momenum Auhors and Year of publicaion Sample period Number of counries examined (region covered) Number of counries wih saisically significan price momenum Bird and Whiaker (2003) (European counries) 5 (Germany, Ialy, The Griffin e al. (2003) (counries from all coninens) Hurn and Pavlov (2003) (Ausralia) 1 (Ausralia) Neherlands, Swizerland, UK) 20 (including Souh Africa, Chile, New Zealand, Ausria, Belgium, Finland, Greece, Ireland, ec) 7 (Belgium, Germany, France, The Doukas and McKnigh (European counries) Neherlands, UK, Denmark, and (2005) Norway) Anoniou e al. (2007) (European counries) 3 (UK, Germany and France) Galariois e al. (2007) (UK) 1 (UK) Two sreams of research aemp o raionalise momenum; one is risk-based, while he oher sems from behavioural finance. The firs argues ha momenum invesing enails significan risks, hence receives higher payoffs (Conrad and Kaul, 1998; Berk e al., 1999; Fama and French, 1996; Avramov and Chordia, 2006); while he laer posulaes ha psychological and oher biases resul in sysemaic underreacion leading o momenum (Barberis e al., 1998; Hong and Sein, 1999; Hong e al., 2000; Doukas and McKnigh 2005). I is imperaive ha before one subscribes o he laer camp, mainsream risk based explanaions are exhaused, hence he emphasis placed on hem by recen lieraure. Jegadeesh and Timan (1993) discard risk as an explanaion for momenum in a univariae conex, while Fama and French (1996) follow sui in a mulivariae one. However Conrad and Kaul (1998), aribue momenum o cross-secional dispersion in uncondiional mean reurns, bu heir work is criicised by Jegadeesh and Timan (2002) 1. In general, he quesion of wheher momenum is risk relaed remains open o debae and more evidence from differen markes is required. 1 While some papers use condiional modelling (Anoniou e al., 2007; Avramov e al., 2007), ohers rejec connecions of macroeconomic risk and momenum profis (Griffin e al., 2003; Liu e al., 2006). Alhough condiional models ouperform uncondiional ones, hey are no bias-free. Daniel and Timan (2006) sugges ha condiional models apparen success can be aribued o he low saisical power of he es used. Hence, furher research should be performed in his field, especially o derive an appropriae mehodology o es he models. 4

6 3. Mehodology 3.1. Daa The paper is a firs based on he consiuens of he S&P/ASX 200 Index, moivaed by he fac ha his sample is represenaive of he marke as i includes he 200 larges socks lised in he Ausralian Securiy Exchange and covers 80% or more of he Ausralian equiy marke capialisaion. This sample also precludes a number of poenial explanaory facors for he performance of such sraegies such as he small firm effec, illiquidiy and risk. More specifically he index is recognised globally as represenaive, liquid, radable, and an easily replicable index allowing widespread use by insiuional invesors, managers of muual funds and financial advisors. Hurn and Pavlov (2003) indicae, for example ha one paricular characerisic of he Ausralian equiy marke is he low liquidiy encounered for small socks, while according o Demir e al. (2004) socks wihin he S&P/ASX 200 Index are larger and more easily radable han oher non-index socks. This consequenly prevens momenum invesors, who ofen engage in frequen rebalancing, from excessive coss such as commissions and bid-ask spreads. The sample period for he S&P/ASX 200 daa is from July up o April During his period one encouners sub-periods of sabiliy as well as bull and bear markes, allowing he examinaion of momenum performance in Ausralia under differen marke saes. The sample conains monhly observaions of marke capialisaion, marke o book values and sock reurns downloaded from DaaSream Inernaional and measured in Ausralian dollars adjused for dividends. The index reurns and he nominal risk free rae are proxied by he S&P/ASX 200 Index adjused for dividends, and he 1-monh Ausralian Dealer Bill 3, respecively. To avoid survivorship bias, he sample includes acive and dead socks 4. Furhermore, o ensure ha his index is realisic as regards consiuen changes, he sample is rebalanced every 3 monhs and is componens are adjused in accordance o he Index Commiee decisions 5. Companies are included in he sample for he whole ime hey remain par of he index. As equiies ener and exi he S&P/ASX 200 Index, he inclusion of a paricular sock depends on wheher i remains on he consiuen lis for a sufficien period of ime (he enire ranking period plus one monh in he pos-formaion period). Following Demir e al. (2004), where a sock exis he lis before he culminaion of he sraegy, he reurns are deermined for he period of ime when i is on he lis and he sock is considered o be held in he form of cash aferwards. Finally, in order o avoid any backfilling bias, hisorical daa for laely-included equiies is no incorporaed ino he sample se. As a resul, he sample is consruced so ha here are approximaely 200 acive socks a any poin in ime, hough he whole sample consiss of 349 firms overall. 2 The S&P/ASX 200 Index was inroduced in April For analyical purposes, his sudy sars is invesigaion in July 2000 which is he firs monh of he financial year in Ausralia. Noneheless, using January insead of July shows ha he resuls are here no sensiive o he choice of saring monh. 3 The sample period and ype of firms for his par of he paper is similar o Beman e al. (2009) alhough hey use daily daa, and we also examine he effec of differen saes on performance. Noe ha I laer repea ess exending he sample period and sample socks. 4 Informaion abou socks, changes of company names, mergers and acquisiions, inclusion, ec., is based on DaaSream Inernaional, he Ausralian Securiy Exchange and he Ausralian Shareholder s Associaion websies (hp:// also hp:// 5 The Index Commiee reviews he lis of he consiuens every quarer (reviews ake place on he hird Friday of December, March, June and Sepember) in order o ensure appropriae marke capializaion and liquidiy. An assessmen of boh characerisics is based upon he former six monhs worh of daa. 5

7 The above sample selecion aspires a securing resuls ha are no driven by he inclusion of small, less ransparen, illiquid, and more expensive o rade securiies. Likewise, such a sample makes he paper relevan, in ha i examines realisic and execuable rading sraegies ha are of ineres o he invesmen communiy. However, for Ausralia, Gaun and Grey (2003) find ha posiive auocorrelaion, which is a necessary condiion for momenum profis, is an explici characerisic of large socks, while smaller and medium ones are negaively correlaed. The implicaion is ha resuls here and for earlier papers by Hurn and Pavlov (2003) and Beman e al. (2009) ha are based on large socks can be biased favourably owards finding momenum. To deal wih his, he paper also ess All Ausralian firms for momenum for he same and for an exended ou of sample period up o he end of Similar daa-ypes as for he earlier sample are downloaded for all acive and dead firms, leading o a sample of 2214 securiies ha adhere o he inclusion crieria. More deails on he inclusion crieria, he sample and is characerisics are given in he relevan secion Mehodology This sudy invesigaes momenum sraegies in he spiri of Jegadeesh and Timan (1993, 2001), deviaing in ha i does no implemen overlapping porfolios arguing ha frequen rebalancing leads o high ransacion coss and less aracive sraegies for professional raders and he marke place. Sock selecion for porfolio inclusion is based on reurns over he previous 1 o 4 quarers, referred o as J-monh ranking periods 6. Similarly, he holding, pos-formaion, periods examined, are denominaed in K-monh inervals ha vary from 1 o 4 quarers. This leads o 16 sraegies in oal, wih each sraegy examined and esed separaely. A he end of each formaion period, socks are sored o quiniles, in descending order, based on heir oal reurn over he previous J monhs. More specifically, he op quinile includes socks ha performed bes over he relevan formaion period and as one moves o lower quiniles performance is progressively worsening, wih he very wors performers forming he boom quinile. The op porfolio is called he winners porfolio (W), while he boom one is called he losers porfolio (L) and he momenum zero cos (winner minus loser, WML) porfolio shors L o long W for he nex K monhs. A he end of each holding period boh posiions are closed, socks are ranked again based on he new se of he pas J monhs, new porfolios are creaed, and new posiions are aken for he nex K monhs. For example, for he 6X6 sraegy, porfolios are consruced in he following manner: he firs ranking period sars in July and lass o December 2000 (J=6). A he end of December 2000 socks are ranked o op and boom porfolios. Then, posiions are aken accordingly and held from January ill he end of June 2001 (K=6). The whole process is hen repeaed saring from January 2001 as he firs monh of he nex ranking period and so on. There are various oher ess and robusness checks ha are performed and hese will be explained in he subsecions ha he relevan resuls are presened o avoid complicaion. 6 egarding porfolio formaion, sraegies are implemened wihou (wih) a delay beween he ranking and holding periods for he S&P/ASX 200 (full) sample. esuls are robus, and if anyhing, skipping a monh increases profiabiliy dealing wih he bid-ask bounce, consisen wih he lieraure. This sudy is also based on monhly reurns ha are less sensiive. In addiion i researches he larges and mos liquid Ausralian socks when focusing on he S&P/ASX 200, hence he bid-ask bounce is less imporan for ha sample. Once he full sample ha includes less liquid and smaller socks (hence more sensiive o his problem) is employed, he paper does skip a monh beween ranking and holding windows. 7 Noe ha es are repeaed for differen saring monhs and resuls are robus o his. 6

8 4. esuls 4.1. Evidence of relaive srengh porfolio performance This secion discusses he performance of momenum sraegies applied o he larges and mos liquid socks in he Ausralian Securiy Exchange, for he period beween July 2000 and April Table 1 presens he average reurns of he differen buy and sell porfolios, as well as zero cos porfolios, reporing he resuls for 16 sraegies (all possible combinaions of he 4 differen formaion and holding periods). The mos successful sraegy is he one ha selecs socks based on heir performance over he previous 9 monhs and holds hem for he nex 6 monhs, wih gains of 2.7% per monh (-saisic: 3.62). For all differen combinaions of J and K, hedge porfolios generae posiive, and saisically significan reurns, ha are greaer compared o oher developed markes. For example, he mos successful hedge porfolio of Jegadeesh and Timan (1993) yields 1.31% per monh, while reurns documened by Grundy and Marin (2001) and Chordia and Shivakumar (2006) are lower a 0.86% and 0.76%, respecively. Noneheless, resuls are similar o hose presened by Anoniou e al. (2007), wih magniudes of 2.10%, 1.82% and 1.44% for he U.K., Germany and France, respecively. Mos imporanly, he findings are in line wih Ausralian momenum evidence of Demir e al. (2004) wih monhly reurns of 2.83% and Hurn and Pavlov (2003), who documen a reurn of 2.73%. However he resuls sand a odds wih Durand e al. (2006a) who do no find a significan difference beween winners and losers performance. Ineresingly, his is no due o mehodology discrepancies since all cases closely follow Jegadeesh and Timan (1993). I is possible ha his relaes o performance insabiliies menioned earlier, as he sudies examine differen sample periods. Demir e al. (2004) conduc heir ess for 1991 o 2001, while Durand e al. (2006a) examine 1980 o Even hough hese wo periods overlap for nearly 10 years, he resuls repored are dramaically differen, suggesing a significan negaive influence of he period beween 1980 and 1991, i.e. ha momenum is no consisenly profiable in all periods, inuiively reducing is desirabiliy. Hence, he quesion formerly expressed on he emporal persisence of momenum, gains furher imporance under hese resuls. Anoher ineresing finding also discussed laer on, is ha given he insignifican loses for shor posiions, profis seem o be driven by winners. [INSET TABLE 1 ABOUT HEE] Table 2, presens average monhly reurns of wo specific horizons for five differen porfolios (P1 o P5), where P1 consiss of op pas winners, P2 of he second bes performance group, and so on, all he way down o P5 wih he exreme losers. The choice of which horizons o analyse due o space limiaions is done as follows. The 6X6 horizon is seleced because i is exensively used as a represenaive case of momenum sraegies, allowing more informed and accurae comparisons wih he exan research. The 9X6 sraegy, is he mos profiable one idenified in his sudy, and from an invesor s perspecive, i is he one ha calls for furher analysis. In general, he able reveals a direc monoonic relaionship beween reurns and differen momenum ranks similar o Jegadeesh and Timan (2001) for he 6X6 sraegies. esuls are similar for he oher sraegy wih P3 breaking he monoony. The difference beween he reurns of he wo exreme porfolios (P5-P1) is reliably differen from zero a 2.52% and 2.70% for he 6X6 and he 9X6 sraegy respecively. [INSET TABLE 2 ABOUT HEE] 7

9 4.2. Evidence on he sabiliy of performance Having esablished he average profiabiliy of momenum sraegies for he S&P/ASX 200 sample, i is now imporan o invesigae wheher his a sable occurrence across ime or more perinen o differen periods as implied by aforemenioned sample period relaed discrepancies. To es for his, he sample period is divided ino several sub-periods and Table 3 presens average monhly reurns of winner, loser and zero cos porfolios for he wo sraegies ha were analysed in Table 2, wih respec o differen ime periods. The full sample period for he S&P/ASX 200 firms (denoed in he able as All ) has been divided ino wo sub-periods. The firs period is beween January 2001 and March 2003 and is characerised by sabiliy for he Ausralian marke wih some occasional downward movemens. The second period consiss of he remaining 49 monhs during which he marke experienced coninuously significan upward drif. Analysis of hese wo periods for Ausralia can reveal wheher momenum profis are associaed or no wih expansionary and/or sable marke saes. The able also analyses annual performance, and presens he average performance of an equally-weighed index (EWI) of all 200 securiies, and he percenages by which winners (losers) ouperform (under perform) he EWI. Boh he 6X6 and 9X6 sraegies reveal similar resuls. Momenum profis appear o be much sronger ou of book periods. More specifically, he firs relaively sable 27 monhs, reurn a saisically significan 5.24% and 5.39% for he 6X6 and he 9X6 sraegies respecively. During he nex 49 monhs, when Ausralia is characerized by a disinc boom, momenum profis are much lower, ye remain posiive and saisically significan a 1.02% (-saisic: 2.12) for he 6X6 sraegy and 1.38% (-saisic: 2.60) for he 9X6 sraegy. This is consisen wih Anoniou e al. (2007) who also find higher reurns during wors marke periods for oher economies. This would be explained if losers consisenly conribued more o momenum profis han winners did. Anoniou e al. (2007, p. 962) find ha excep in he case of France, a large porion of momenum profis comes from loser socks, conradicory o Jegadeesh and Timan (2001). Looking a he winner and loser columns in conjuncion o he las wo columns verifies ha profis for boh sraegies in he firs 27 monh period can only be driven by he shor posiion ha has a higher EWI differenial and reurn. This is corroboraed by he fac ha he 49 monh period where profis are reduced, coincides wih lower loser differenials and higher winner reurns. Overall, he differences of he sub-period analysis and he resuls for he full period show ha alhough winners seem (as in Tables 1 and 2) o be driving profis across ime, his may no be he case a all imes depending on marke performance, wih implicaions for he exan research. Ineresingly, yearly profiabiliy analysis demonsraes ha reurns are lower afer he firs wo years, and in 2003 and 2005 hey are saisically and o some exen economically insignifican as well. In oher words momenum does no generae uncondiional profis in all years. For example, for he 6X6 sraegy, boh winners and losers generae posiive reurns of similar magniudes in 2003, i.e. momenum invesors experience profis in heir long posiions ha are cancelled ou by posiive reurns in heir shor posiions ha picked up in value. Consequenly, momenum invesmen yields negaive reurns for he 6X6 sraegy (where losses on losers exceed profis from winners), or insignifican posiive reurns for he 9X6 sraegy (where losses on losers almos compleely absorb profis from winners). During he nex hree years momenum profis are higher again. [INSET TABLE 3 ABOUT HEE] 8

10 4.3. Evidence on seasonaliy Jegadeesh and Timan (1993, 2001), Anoniou e al. (2007) and Durand e al. (2006a), find noable seasonaliy in momenum profis for he U.S., Europe, and Ausralia respecively. Analyically, Jegadeesh and Timan (1993, 2001) repor ha winners ouperform losers in all monhs excep January when profis are smaller or negaive compared o oher monhs. Anoniou e al. (2007) resuls are similar albei no negaive. Durand e al. (2006a) focus on boh January and July reurns in order o capure he srong influence of he U.S. marke for January 8 and o emphasize he role of July as he firs monh of he financial year in Ausralia (o mimic he U.S. January effec). They find significan negaive reurns for July, which parallels he U.S. January effec. This could poenially explain some of he performance differenials found previously; hence his secion addresses he issue of seasonaliy. Following he above paper I examine January and July reurns, while a a laer secion I check he performance for each calendar monh wih he expanded sample. Table 4 presens average monhly reurns for winner, loser and momenum porfolios for boh he 6X6 and 9X6 sraegies wih respec o he individual monhs of January and July and ouside hese monhs. esuls are similar o Jegadeesh and Timan (1993, 2001), and Anoniou e al. (2007), ye no surdily, as January reurns may be lower relaive o oher monhs bu here he difference is no economically significan. Un-abulaed resuls show ha hey are also saisically insignifican for boh sraegies (6X6 -saisic: -0.89; and 9X6 - saisic: ). Furhermore, conrary o Durand e al. (2006a), findings of his paper do no repor negaive reurns in July bu documen relaively high ye saisically insignifican average payoffs insead Evidence of abnormal reurns [INSET TABLE 4 ABOUT HEE] Moivaed by he coninuing debae in he lieraure regarding risk based proposiions for differen invesmen syles his subsecion quesions wheher he resuls repored hus far are due o risk. If risk explains momenum performance in Ausralia, hen momenum sraegies are likely o selec socks wih high sensiiviy o general equiy marke movemens. In his case he higher reurns found so far are no abnormal bu reward invesors for bearing his addiional risk. The paper resors o single and muliple risk consideraions given he lack of evidence on mulifacor momenum consideraions for Ausralia. In addiion, moivaed by he exisence of a downside risk premium for he U.S. (Ang e al., 2006), and following Van der Har e al. (2005), I examine wheher differen marke saes affec he risk and reurn characerisics of momenum sraegies. The analysis begins wih he CAPM model regression: p, f, M ( M, f, ) (1) where p, is he monhly reurn on he equally-weighed hedge porfolio (WML) of he paricular JXK sraegy, M, is he corresponding monhly reurn on he S&P/ASX 200 index ha proxies for marke reurns, and f, is he 1-monh Ausralian Dealer Bill rae ha proxies for he nominal risk free rae. 8 For more informaion abou he influence of U.S. socks on Ausralian socks see Durand e al. (2001) and Durand e al. (2006b). 9

11 esuls for he zero cos porfolios are presened in Table 5. As can be seen, for all sraegies, reurns adjused for marke risk as measured by he inercep α are posiive and saisically significan wih one excepion, ha of he 12X12 porfolio. The abnormal reurns esimaed from hese regressions are also economically significan and acually very close o he raw reurns presened in Table 1. Hence, eiher marke risk does no explain resuls, or his model, or facor proxy, are inappropriae for capuring risk in a mulifaceed world. [INSET TABLE 5 ABOUT HEE] I is also eviden in he resuls ha for all sraegies he β s are negaive probably due o a difference in he loadings of he exreme porfolios, i.e. if his is correc, momenum porfolios ac as a hedge o marke movemens consisen wih earlier findings of a somewha inverse relaionship of momenum performance and marke saes. This is confirmed by Table 6 ha analyses he resuls for all quiniles of he wo key sraegies analysed so far (6X6 and 9X6). As can be seen, exreme losers have a higher loading on marke risk han winners in boh cases. Analyically, he β loading of losers for he 6X6 sraegy is 1.34 compared o 0.82 for winners, while for he 9X6 sraegy he loser s β loading a 1.28 is double o ha of winners. This is no in line wih he resuls of Jegadeesh and Timan (2001) for he U.S., bu is consisen wih De Bond and Thaler (1987), as marke beas of losers (winners) are above (below) 1. For boh sraegies, winners are less risky han losers. This however canno explain abnormal reurns, given ha he alphas of he zero cos sraegies are saisically and economically significan, as well as all he alphas of he quiniles wih he excepion of P4, i.e. excess reurns seem no o be a compensaion for carrying excessive marke risk. [INSET TABLE 6 ABOUT HEE] Our resuls so far have shown ha here are higher momenum reurns in sable or mildly recessionary periods, and a more significan conribuion o momenum profis from losers, who on average are more risky han winners. The quesion ha sill remains however is wheher hese reurn and risk properies hold a all saes. According o De Bond and Thaler (1987) losers do no have higher loadings consisenly, hey are acually more (less) sensiive during bull (bear) markes. If ha is he case here as well, hen risk may be able o explain reurns once one differeniaes beween saes using he subsequen model: p, I m, f, f, I 0 m, M f, ( 0 M, M f, ( ) I M, m, f, f, 0 ) I m, f, 0 (2) where p,, M, and f, are as before. I {A} represens a dummy variable depending on he even A, in a way ha I {A} = A, if A occurs, or 0 if i does no. Consequenly, esimaes of β - Μ and β + Μ deermine marke risk a recession or expansion respecively, and α - and α + quanify excess reurns analogously. Table 7 shows he esimaes derived from he above model for winner and loser porfolios of he 6X6 and 9X6 sraegies, under differen marke condiions. I is worh noing ha he difference beween downside and upside beas is relaively high. For example, he downside bea for winners is 1.10 compared o an upside value of 0.78 for he 6X6 sraegy, similarly for losers of he 9X6 sraegy, implying ha hey are possibly exposed o excessive downside Ausralian equiy marke risk. When analysing excess reurns (α -, α + ) i is clear ha he sraegies can sill exhibi posiive excess reurns ha are no explained by his relaionship 10

12 In addiion i seems ha he 9X6 sraegy benefis from his in boh up and down markes as opposed o he 6X6 sraegy. For example winners have saisically and economically significan excess reurns during marke downurns despie heir posiive exposure o risk, indicaing ha resuls are no relaed o risk. The resuls presened in Table 7 are no unambiguous and as such heir inerpreaion migh be difficul, and mos probably as Anoniou e al. (2006) indicae hey may be due o inappropriae risk measuremen. [INSET TABLE 7 ABOUT HEE] The above ambiguiy and he poenial for risk mis-measuremen reinforce he need a his sage o examine wheher an alernaive model is more appropriae for his marke. In oher words, can he reurns described so far as abnormal be rewards for bearing risk associaed wih he Fama and French excess marke reurns index, marke capializaion differences, and book-o-marke differences? And if so, why hese facors and no oher, especially given ha he exan lieraure (Fama and French, 1996; Jegadeesh and Timan; 2001) have failed o raionalise momenum using his model? The answer is ha we are unaware of he performance of his model for momenum research in Ausralia as here is shorage of evidence 9. Noneheless, Halliwell e al. (1999), Faff (2004), Gaun (2004), Durand e al. (2006b,) have all shown ha for oher areas of research o he one here, hese facors are perinen o Ausralia, especially for large socks like he S&P/ASX 200 consiuens. For example, Halliwell e al. (1999) find ha he level and saisical significance of Fama and French facor sensiiviies are similar o hose documened by Fama and French (1993). This model aemps o explain porfolio excess reurns by sensiiviies o he marke reurns in excess of risk free rae, M, - f,, he difference beween he reurns generaed by porfolios of small and big socks (SMB), and he difference beween he reurns on porfolios of equiies wih high and low book-o-marke values (HML): p, f, M ( M, f, ) SMBSML HMLHML (3) Esimaes of he above regression presened in Table 8 for all 16 hedge porfolios reveal ha only 4 of hem (9X3, 9X6, 12X3, 12X9) yield saisically significan risk-adjused reurns. This suggess ha he model may capure some of he momenum profiabiliy for his marke. Comparing he esimaes wih he CAPM ones in Table 5, hey are much weaker economically. The higher magniude of he adjused 2 clearly shows ha he Fama and French model is superior o CAPM, consisen wih previous sudies (Avramov and Chordia, 2006). In line wih he above, mos hedge porfolios load heavily on SMB and HML facors, while he marke facor is insignifican. In all cases, SMB sensiiviies are significanly negaive consisen wih U.S. evidence by Jegadeesh and Timan (2001), and inernaional evidence by ouwenhors (1998). HML facor loadings are all posiive and saisically significan wih excepions in Panel D where J=12. This sands in conras o previous sudies (Fama and French, 1996), and migh be he reason for which he model appears more relevan here compared o momenum sudies in oher markes. [INSET TABLE 8 ABOUT HEE] 9 Please noe ha alhough Demir e al. (2004) do no examine wheher heir repored reurns are abnormal using a widely acceped model such as he Fama and French model (1993), hey do consider he effecs of boh size and liquidiy on momenum. 11

13 The implicaions of he above findings will be forified or weakened following he analysis of he 6X6 and 9X6 sraegies in Table 9. More specifically, if hey are consisen wih he above findings hen hey will indicae ha for his marke he model works, and perhaps furher longer window ess will be required o make a case of his. If however he resuls are mixed, hen a bes one could argue for he fac ha his model is superior o he CAPM, ye imperfec. As can be seen, he in-deph analysis reveals resuls ha are inconsisen wih he general ones in he previous able, given ha in he majoriy of reurns are sill economically (albei less so) and saisically significan afer orhogonalisaion o he hree facors. Perhaps he answer as o he previous able s resuls ress in he fac ha loser reurns are now insignifican, explained by he fac ha he losers load more heavily on SMB and HML. If losers consisenly drive momenum profiabiliy for large Ausralian sock momenum sraegies, hen he momenum sraegies will no deliver abnormal reurns afer adjusing for hese facors, hence α values appear insignifican in he previous able. eurning o able 9, he model does no work equally well for any oher porfolio (P1 o P4) which may explain he discrepancy of he resuls here wih lieraure on oher markes. To summarise, we apply wo models o conrol for risk, namely he CAPM and he Fama French model. The firs fails o explain abnormal reurns wih minor excepions in individual porfolio analysis. The Fama French model offers superior, ye mixed resuls. A firs i seems o be doing a beer job wih higher adjused 2 values and a few significan α s. However, four sraegies remain profiable afer he adjusmen, including he 9X6 sraegy, i.e. one of he wo sraegies analysed in deph in his paper, while he oher (6X6) seems o be raionalised. On closer inspecion of he wo individual sraegies however i is noiceable ha even when sraegies appear o have heir reurns raionalised, hese remain economically significan. For example he 6X6 sraegy reurns are a 0.8% (see Table 9). In addiion, he resuls of he individual sraegies in Table 9 do no suppor he findings of Table 8, as only he loser reurns appear o be raionalised for boh sraegies, consisen wih he earlier findings of loser driven resuls. The quesion ha comes ou however is why does one become insignifican while he oher remains significan afer he adjusmen? The answer is ha perhaps only he reurns of he 6X6 sraegy are really driven by losers. This is corroboraed by Table 7, which shows ha for he 9X6 sraegy here are winner abnormal reurns for upmarkes as well as in down markes, so perhaps he difference comes from differen marke saes. The fac ha only he reurns of he 6X6 sraegy are really driven by losers is hidden when looking in raw reurns in Table 1, bu in Table 6 he exreme porfolio CAPM α values are very differen for he 6X6 sraegy bu no for he 9X6 sraegy 10. This shows ha in he firs case he loser s conribuion is much larger han he winner s one. Therefore, if he addiional wo Fama French Facors, capure he loser s conribuion, hen hey should render only he loser-driven 6X6 sraegy unprofiable, consisen wih he acual resuls and he lieraure (Fama and French, 1996). [INSET TABLE 9 ABOUT HEE] 4.5. Evidence from an exended sample and sample period The paper has so far considered he consiuens of he S&P/ASX 200 index for he Ausralian marke o perform an analysis of he performance of momenum sraegies beween 10 More specifically, he winner s (P1) and loser s (P5) reurns are very differen for he 6X6 sraegy a -1.78% and 0.95%. A he same ime, he 9X6 sraegy values of he exreme porfolios are very close a -1.53% for (P5) and 1.46% for (P1). 12

14 2000 and April Alhough concenraing on he larges mos raded firms for mos markes would normally suffice in dealing wih a major par of he effecs relaed o he small firm anomaly and he relaed hazards such as low analys coverage, low ransparency, low informaion diffusion, hence higher rading coss and risk, as well as hin rading and oher microsrucure biases. However, for he Ausralian marke, he selecion of he larges firms o es for momenum can bias he resuls. More specifically, Gaun and Gray (2003) show ha large sock auocorrelaion is posiive up o welve monhs, conrary o ha of small and medium socks ha appears o be negaive. If he larges 200 socks are posiively auocorrelaed, while he res are negaively auocorrelaed, one can expec ha resuls so far, including hose of Hurn and Pavlov (2003) and of Beman e al. (2009), can be associaed o firm selecion, since all hree examine larges firms momenum. In addiion, Durand e al. (2006a) do no suppor momenum in Ausralia converse o Demir e al. (2004) due o sample differences. I herefore seems ha he performance of momenum sraegies in Ausralia may be specific o he sample period and sock selecion crieria. To his end, his secion exends he sample o include all Ausralian firms so as o assess he poenial effec of he findings of Gaun and Gray (2003). In addiion all exising sudies end heir sample in 2007, so as o check if momenum profis are sample specific, he paper exends he sample period o he end of 2009, in a way providing an indirec ou of sample es. More specifically, daa are downloaded from DaaSream Inernaional on live and dead firms. Socks are included in he sample for periods ha hey rade a prices above 50 cens (Durand e al., 2006a, Demir e al., 2004). Firms ha do no rade for 3 or more consecuive monhs are no included in he ess for ha paricular period. I end up wih a sample of socks ha is in oal 2214 socks. As can be seen in Table 10, he number of firms available a any one year ranges from 1026 firms a he sar of 2000 o 1835 a he sar of The able also shows a decrease in he number of firms for he firs ime in More specifically, from he sar of 2008 o he end of 2009 here is a decrease of firms by 125, or abou 7%, possibly due o he crisis. A number of firms ha sop rading during he las year, bu have enough daa o be included o he sample (based on he crieria se a he sar of he paper consisen wih he exan lieraure) are no deleed, bu if so, he decrease in he number of firms would be even larger. [INSET TABLE 10 ABOUT HEE] The mehodology applied here is he same as for Table 1, wih one excepion. In Table 1 he paper does no skip a monh beween he formaion and pos-formaion periods. This choice was made because he daa frequency used (monhly) and he sock sample used (S&P/ASX 200 consiuens) of he larges and mos liquid Ausralian socks miigae he effec of he bid-ask bounce. If anyhing his effec would bias he resuls agains finding momenum profis due o he spurious negaive auocorrelaion i induces, which should no be a problem since he paper found profis. In his secion however, he sample also includes smaller firms, i.e. he effec of no skipping a monh beween he ranking and holding periods can be more dominan and herefore his secion skips a monh. As expeced, skipping is relevan for his sample and acually increases profiabiliy. For example, in un-abulaed resuls, when looking in he 3x3 momenum sraegy wihou skipping a monh beween porfolio ranking and holding, momenum reurns are insignifican compared o when a monh is skipped 11. In addiion, he ranking periods so far commence in July (i.e. he sar of he financial year in Ausralia), hence resuls may be specific o he saring monh of July 2000, 11 More specifically, momenum porfolio reurns WML are economically and saisically insignifican a 0.2% (-saisic: 0.44), wih loser reurns equal o -1.1% (-saisic: -1.46) and winner reurns equal o -0.9% (saisic: -1.31). Compare his o ables 11 and 12 where a monh is skipped and reurns are significan. 13

15 and since i is no ypical in momenum sudies, his secion s ranking periods commence in January 2000 o show wheher he resuls are robus o differen saring monhs. Table 11 presens he average reurns of he differen long and shor porfolios, as well as he zero cos porfolios for all Ausralian firms over he exended period o he end of 2009, reporing resuls for all 16 sraegies (as in Table 1). In Table 1, all momenum sraegies deliver saisically significan reurns, driven by pas winners. Table 11 shows ha when all firms are considered for an exended period by skipping a monh beween J and K he resuls change mainly in hree respecs. Firsly, he highes reurn now comes from he 6X9 sraegy wih a monhly average reurn of 1.5% (-saisic: 4.58), compared o Table 1, where he bes performing sraegy was he 9X6 wih an average reurn of 2.7% per monh (-saisic: 3.62). Secondly, as is he case above, for he majoriy of sraegies he profis are economically less significan compared o hose in Table 1. For example, momenum reurns for he hree monh ranking period for all Ks in Table 11 range beween 0.6% and 1.0%, while in Table 1, hey assume values beween 1.95% and 2.53%, i.e. for hese sraegies, he lowes value in Table 1, is abou hree (wo) imes higher han he lowes (highes) value of able 11. Thirdly, by looking a he economical and saisical significance of he overall shor and long posiions, he profiabiliy of he hedge porfolios is now driven by he shor posiion in losers, compared o Table 1, where he long posiion in winners appeared o be responsible for momenum reurns 12. More specifically, here he reurns of he overall losers (winners) are saisically and economically significan (insignifican), leading o posiive ye weaker momenum performance. This difference can be aribued o eiher he change of he firms included in he sample, i.e. moving from large o all firms, or of he exension of he sample period and more specifically he financial crisis. [INSET TABLE 11 ABOUT HEE] To deermine which of he wo above possibiliies is liable for he discrepancies beween Tables 1 and 11 all sraegies are repeaed excluding he ime period (also perinen o he financial crisis). If resuls qualiaively rever back o he ones in Table 1, hen he change can be aribued o he sample period. Furhermore, by also comparing he resuls wih hose of Beman e al. (2009), i is possible o assess he effec of he addiional sample firms, given ha boh sudies share similar sample periods, bu now differen sample firms. Table 12 presens he same resuls as Table 11 for All Ausralian firms bu for a sample period equal o ha of Table 1. As can be seen, when he sample is resriced o 2007, he findings change. Momenum profis remain significan like before, bu increase heir economic significance when he crisis is excluded. For example he highes monhly reurn now in 1.9% and is significan a he 1% level, and he majoriy of reurns are around or above 1.5%. Anoher ineresing finding is ha he resuls are no driven any more by he shor posiions in losers (as was he case in Table 11), bu mosly by he long posiions in winners (similar o Table 1). More disincively all 9XK and 12XK winner reurns become saisically significan (as in Table 1), while all losers for all 16 sraegies deliver insignifican reurns (as in Table 1). This resul is consisen wih no only our resuls in Table 1, bu also wih Beman e al. (2009), who find a higher winner conribuion compared o losers. [INSET TABLE 12 ABOUT HEE] esuls so far indicae ha during (ou of) he period losers (winners) drive momenum resuls. Overall, Ausralian momenum sraegies remain profiable during he 12 Noe ha his is wih reference o he general case here and no o he specific analysis of he 6X6 and 9X6 sraegies where he dynamics appeared o be differen, as can be for any individual sraegy. 14

16 crisis, ye hey are less economically significan. Durand e al. (2006a) in a carefully conduced sudy use monhly daa, find negaive resuls for momenum beween 1980 and he end of 2001, bu hey find a srong seasonal regulariy associaed wih July, he firs monh of he Ausralian financial year (p. 361). A his sage he paper ess wheher conrolling for he above can aler resuls. If his is he case, he findings of Durand e al. (2006a) are valid ou of sample. Noe ha as hem, I use monhly daa on all Ausralian companies. Table 13 presens he average seasonal reurns of he 6X6 and 9X6 long and shor porfolios, as well as he zero cos porfolios for all Ausralian firms. The resuls are consisen wih Durand e al. (2006a), i.e. heir seasonaliy findings are valid many years ou of sample. More specifically, as for hem, resuls for January for boh he 6X6 (Panel A) and 9X6 (Panel B) sraegies are negaive and saisically insignifican, and he resuls for July are boh negaive and saically significan, wih losers displaying large posiive reurns. Any differences beween Table 4 and hese, as well as he resuls of Durand e al. (2006a) are no relaed o he sample period bu sample selecion i.e. larger firms in Ausralia are no seasonal. According o able 13, performance (profis and losses) are driven by shor posiions in losers. According o Panel A, he only ime when winners reurns are significan a he 5% level ye negaive a -2.8%, is June, bu WML June profis are high a 3.9% (-saisic: 3.85) driven by he significan high negaive shor posiion reurns of 6.7%. Overall 6x6 momenum sraegies have significan posiive (negaive) reurns in four (one) ou of welve monhs. Columns 6 o 9 of Panel A, where he reurns for all oher monhs are presened, verify ha winner reurns are no conribuing o he 6x6 sraegy performance (consisen wih earlier argumens relevan o he hree facor model findings). As seen in he las column, resuls are significan when hedge porfolio reurns are posiive a more han 65% of imes. Panel B performs he same analysis for he 9x6 sraegy wih similar resuls, i.e. posiive and saisically significan reurns in four cases (albei no for idenical monhs), wih saisically significan losses in July. The hedge porfolio reurns for any 11 monh period (columns 6 o 9) are posiive and saisically significan, driven again by losers, ranging from 0.86% o 1.64%, wih 10 ou of 12 cases giving a reurn higher han 1% per monh. When simulaneously excluding boh January and July, conrary o Durand e al. (2006a), momenum profis are significan for boh sraegies, becoming insignifican only when 6 of 12 monhs (January and all significan monhs) are excluded. I is hus difficul o argue ha profis are due o seasonaliy, bu easier o suppor ha performance varies across monhs. [INSET TABLE 13 ABOUT HEE] Table 14, presens resuls of he Fama and French hree facor model regressions (as in Table 8) using he full sample of Ausralian equiies for he period January 2000 o December As in Table 8, he resuls show ha he model fails o conrol for momenum, consisen wih he exising lieraure. Hedge porfolio reurns remain saisically significan a 7 of 16 sraegies, while hey are in cases economically significan even when saisically insignifican. For example, he 3X3 and 6X6 sraegy reurns are a 0.9% and 0.73%. The adjused 2 values of he model also appear o be lower han before. 5. Conclusions [INSET TABLE 14 ABOUT HEE] This paper invesigaes momenum sraegies in he conex of he Ausralian marke for wo securiy samples and wo sample periods. The firs sample consiss of he S&P/ASX 15