The Momentum Effect: An Empirical Study of the Oslo Stock Exchange

Alexander Vas & Kristoffer Absalonsen

Studenteropgave: Kandidatafhandlinger


In 1993 Jegadeesh & Titman documented that a trading strategy based on buying stocks that have performed relatively well in the past and selling stocks that have performed relatively bad in the past realize positive returns over medium-term horizons. This is often referred to as a momentum effect. Such a trading strategy contradicts one of the cornerstones in finance theory, namely the efficient market hypothesis (EMH). This thesis investigates whether the momentum effect has existed on the Oslo Stock Exchange during a 9 year period from 2005 through 2013. We find that 16 different momentum trading strategies realize significant returns, ranging from 1.19 percent to 2.43 percent per month. We also find that momentum strategies with longer formation periods and shorter holding periods tend to be the most successful. Additionally, this thesis illustrates how momentum profits are driven by the worst performing stocks in our sample period. However, a sample split reveals that this result is sample period specific. We also find that increasing the portfolio size and removing extreme return outliers decreases the returns from a momentum strategy considerably. A decomposition of the momentum strategy reveals a majority of the 20 percent smallest stocks in the market, which contribute substantially to total momentum returns. One fifth of the short side in the momentum portfolio consists of quite illiquid stocks. We believe that short sale restrictions question the feasibility of the momentum strategy. Finally, we find that transaction costs almost erase the entire momentum profit. There are several possible explanations for the momentum effect. Some argue that the anomaly is a result of data mining and that it will not persist. However, our momentum literature review presents a large body of evidence, which documents the momentum effect in different stock markets and different time periods. Others argue that momentum profit is simply a compensation for risk. From our regression analysis we find that the Capital Asset Pricing Model and the Fama-French 3-factor model are not able to explain the momentum effect, which is consistent with previously conducted studies. In the absence of other explanations, theoretical models within the field of behavioral finance have become important contributions in trying to explain the momentum effect.

UddannelserCand.merc.aef Applied Economics and Finance, (Kandidatuddannelse) Afsluttende afhandling
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