The Price Momentum Effect: An Empirical Study of the Danish Stock Market

Lukas Sverre Willumsen & Lasse Matthias

Student thesis: Master thesis


This paper investigates and confirms previous findings related to the price momentum effect. By applying the momentum strategy framework by Jegadeesh and Titman (1993) to the stocks in the Danish OMXC index from 2000-2017, this paper is able to find significant results, confirming that price momentum exists. The results are strikingly similar to many previous studies. Consequently, the paper finds that the 12/3-winner strategy and the 9/3-zero-cost strategy are the best performing strategies, generating average monthly returns of 1.98% and 1.85% respectively. In addition, these strategies, along multiple others, significantly outperform the OMXC index benchmark. The statistically significantly positive returns generated in this paper contradict the efficient market hypothesis, which serves as a central part of the conventional financial theory. To explain this anomaly, the relationship between risk and return proposed by the conventional theory is investigated in relation to the momentum strategies, but without any success. In search of alternative explanations, the field of behavioral finance is introduced. Consequently, the dynamic confidence model by Daniel et al. (1998) provides the most substantial explanation. Having taken the cultural context of the markets investigated into account, the model is seemingly able to explain the short-term price momentum documented in this paper, the subsequent longterm price reversal found in multiple previous studies, and the lack of price momentum in Japan as documented by Liu and Lee (2001). Thus, when the assumption of self-attribution bias in the dynamic confidence model is related to the cultural context of the markets in question, the model provides an explanation. It thereby explains why the momentum effect is predominant in the Western markets, and absent in the Japanese stock market where self-criticism prevails self-enhancement, as opposed to the American market where the opposite is proven to be true.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2017
Number of pages140