Value and Momentum: A Winning Combination?

Pernille Dinesen & Stefan Madsen

Student thesis: Master thesis


This master thesis investigates the investment strategies value and momentum in the Scandinavian stock market between 1998 and 2017. The majority of research has focused on the US and European markets in the 1980s and 1990s. Additionally, the past two decades have been rather unorthodox due to one of the worst recessions in history and the implementation of quantitative easing. Therefore, we find it interesting to analyse the strategies under these conditions in new markets. Earlier research found a value- and momentum premium across markets, including Denmark, Norway, and Sweden, and across various time periods. Furthermore, studies concluded that a combination of the strategies was able to improve the return in comparison with the strategies separately. However, a study has not been conducted focused on the Scandinavian market in a relatively recent time horizon.
We apply an integrated approach to construct the combined portfolios, assigning an overall score to each stock based on its momentum- and value rank simultaneously. This approach was found superior to a simpler 50-50 combination of value and momentum. In the stock selection process, various screening signals are applied, including price momentum, book-to-price-, cashflow-to-price-, andearnings-to-priceratio. Finally, thelong-onlyportfoliosarerebalancedevery month.
According to our findings, the value strategy does not confirm earlier conclusions about excess returns compared to neither the market nor growth stocks. On the other hand, the momentum confirms previous studies and its ability to generate attractive risk-adjusted returns. Lastly, the two combination strategies are able to improve the performance of the momentum strategy further by adding a value signal. In the case of multiple value signals, the model does correct some misclassifications of value based on a one-dimension approach. Therefore, an extended version of the combination strategy, including several value signals, is found to be the optimal method. This model delivers the highest average annual return as well as the best risk-adjusted return. Additionally, the strategy is found to be relatively robust through various sensitivity analyses.
Nevertheless, external factors may affect the attractive performance of the momentum and combination strategies. Factors such as increasing capital channelled into passive funds and the implementation of unconventional monetary policies are found to have a material impact on the stock market in the investigated period. Thus, the same superior return is less likely to be replicated in the future.

Educations, (Graduate Programme) Final Thesis
Publication date2019
Number of pages139