Momentum Effect on Stock Market

The momentum effect and its corresponding strategies are based on the inertia in the dynamics of quotes of financial instruments. A portfolio consisting of the stocks that showed the highest return, taking into account changes in the market value and dividends, is called the portfolio of “winners”, and from the stocks that turned out to be the worst in terms of yield, a portfolio of “losers” is formed. It is assumed that the “winners” for the investment period will continue to overtake the market in terms of profitability, and the “losers” will concede to the market, therefore the idea of strategies is simple - opening a long position in the portfolio of “winners” and short in the portfolio of “losers”. The presence of a momentum effect in developed markets has been proven by many authors, and in emerging markets the results were not so clear. However, in recent years there have been studies proving the momentum effect in many emerging markets. In this study, for the samples of stocks on the Russian stock market and stocks that are part of the S&P 500 index, a study was carried out for the presence of a momentum effect and the hypothesis of an effective market for the period from 2012 to 2019. According to the results of testing with the method of overlapping portfolios 3456 strategies with different parameters for each market, it was found that the momentum effect is inherent in the markets of both countries. However, after accounting for transaction costs, the excess return on momentum strategies in the US stock market is eliminated, and in the sample of liquid Russian stocks, momentum strategies yield returns that exceed the returns on the Moscow Exchange's full return index. The highest returns were recorded for medium-term strategies with periods of study of previous returns and investment periods of 6 to 12 months. Common to the markets of both countries is the loss-making of all strategies with portfolios of "losers" even before taking into account transaction costs. There are no strategies with arbitrage portfolios that are profitable after accounting for transaction costs.