“Have the Three Strategies Earned Abnormal Returns Separately? And Have a Combination of These Improved the Quality of the Investment?”

Andreas Kanestrøm & Eirik Ruistuen

Student thesis: Master thesis

Abstract

We have investigated the well-known value and momentum strategies as well as a strategy that involves buying repurchasing shares and shorting issuance shares in the Japanese market. We identified the quality of the strategies by looking at their performance in different time-periods, scrutinizing the contribution to the abnormal return from both long and short positions, measuring its drawdown risk and evaluate the performance by gearing the portfolios. Further, we looked at possible combination opportunities in order to diversify the portfolios further.
We wanted to evaluate the robustness of the value and momentum strategy in tough market conditions, but our main priority was to add to the academic literature involving repurchasing and issuance shares by creating a long/short zero-cost investment strategy. We did this by buying all the firms that repurchased shares and selling all the firms that issued shares in a given month. All firms were taken into the portfolios at the end of the month with a holding period of one year. Thus, we excluded the announcement effect from our portfolios. In addition, we sorted on other measures like the size of the firm. We used data from Kenneth French website to collect the data for both the value and momentum strategies.
We found positive premiums for all three strategies, but only the value and RMI strategy had significantly alpha values. None of the premiums can be explained by risk measured by beta or volatility. A combination of all three portfolios improved the risk adjusted performance than as stand-alone strategies. Adding a fourth strategy, small minus big, improved the risk adjusted performance even further. The highest return made by gearing the portfolios was a combination of RMI and SMB.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages130