Price randomness, contrarian and momentum strategies: a study of return predictability in the Malaysian stock exchange
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Date
2005
Authors
Tafdil, Husni
Journal Title
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Abstract
Using daily data of firms listed on the Main Board of the Malaysian stock market
for the period January 1988 through October 2002, this study looks at the
predictability of returns in the Malaysian stock market. More specifically, the
study attempts to investigate whether the Malaysian stock market is predictable
using past or historical price information. There are three stages in this
investigation. First, the study investigated the randomness of stock prices by
using the variance ratio test. The study finds that the stock returns in the
Malaysian stock market does not follow a random walk in the short and medium
terms i.e. one-month, two-month and three-month intervals, respectively. In the
second stage, the study examined the profitability of contrarian and momentum
strategies by employing a strategy quite similar to Jegadeesh and Titman
(1993). The study reveals that a contrarian strategy appears to work for the
short-term, i.e., one-month ranking and one-month testing period strategy.
Whereas, momentum strategies are profitable at the medium term i.e. for both
two-month ranking and two-month testing periods, and three-month ranking and
three-month testing periods. The last stage was to further investigate the
characteristics of contrarian and momentum effect, namely what factors
determine the magnitude of contrarian and momentum profits. These factors
include firm characteristics such as firm size, book to market (B/M) ratio and
trading volume turnover, and non firm-characteristics such as time varying risk,
seasonality and business cycle. The study found that the short-term contrarian
profits remain profitable even after controlling for non-firm characteristics i.e.
time varying risk, seasonality and business cycle. With regards to firm
characteristics, contrarian profits only exist in small size firms and are more
pronounced for stocks with high B/M, and high trading volume turnover.
Whereas, momentum profits are more pronounced for firms of smaller size, low
B/M ratio, and high trading volume turnover, and during upturn economy.
Momentum profits disappear after controlling for change in risk and seasonality.
Description
Ph.D
Keywords
Business Administration , Stock Exchange