Momentum investment strategy: An empirical and explorative study on price momentum – the Danish evidence

Martin Nørregård

Student thesis: Master thesis


Price momentum is the continuation of stock price movements and price momentum strategies tries to exploit these price movements in order to make a profit. This Master thesis investigates the characteristics of price momentum, the possible causes of price momentum as well as the possible occurrence of price momentum in the Danish stock market through the application of a price momentum strategy. The traditional finance theories and behavioral finance theories are based on different assumptions about investor behaviour and the resulting aggregate market. A trading strategy that buys stocks that have performed well in the past and sell stocks that have performed poorly in the past would be profitable if price momentum exists. The Efficient Market Hypothesis and related traditional finance theories are built on assumptions that would make any price momentum strategy unprofitable. Behavioral finance theories, that contradict traditional finance theories, incorporate the psychology of the investor and other more socially founded factors in order to explain “non-efficient” price movements in the capital markets. An empirical study documenting the profitability of price momentum strategies on the Danish stock market in the period 1988-2008 was conducted. 79 Danish stocks listed on the Copenhagen Stock Exchange in this period were included in the data sample. The stocks were ranked on a monthly basis according to their past 6-month returns and divided into portfolios. A long-short zero-cost trading strategy, which each month took a long position in the portfolio with the highest past 6-month return and a short position in the portfolio with lowest past 6-month return was applied during the entire 20-year period. The empirical study showed that this strategy yielded a monthly return of 1.26 percent as opposed to the 1.11 percent that an Equal Weighted Index yielded representing the average of all the portfolios. A strategy that would have taken a long position in the portfolio with the highest past 6-month return would have yielded 1.96 percent. The results still hold after adjusting for risk. The study shows that momentum is prevalent in the Danish stock market. The behavioral finance theories citing different psychological factors as causes of the existence of price momentum are plausible and more than qualified alternative market theories to the existing traditional finance theories. Price momentum is no longer a market anomaly but a dominating market factor.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2008
Number of pages68