Work detail

Momentum in Stock Returns: Analysis for European Countries

Author: Bc. Kristýna Drmotová
Year: 2016 - summer
Leaders: PhDr. Jiří Kukačka Ph.D.
Consultants:
Work type: Bachelors
Language: English
Pages: 57
Awards and prizes:
Link: https://is.cuni.cz/webapps/zzp/detail/165940/
Abstract: This thesis investigates one of the most pervasive anomalies in the behaviour
of stock returns, the momentum. We analyse whether there is momentum in
European stock returns that would generate profitable investment strategies.
First, we compute the average monthly returns on strategies built in accordance
with the existing literature. Next, we compare returns on momentum strategies
between markets with different levels of capitalization and development.
Further, we test whether these returns can be explained as the compensation
for risk exposures through the Capital Asset Pricing Model. We find that
even though the underlying risk has perceptible predictive power for stock returns,
there still remains a substantial part of abnormal returns unexplained
by this model. Therefore, we extend it with additional explanatory variables
that might have a predictive power for stock returns according to the Fama &
French (1993) three-factor model and Fama & French (2015) five-factor model.
We find that stocks that performed best over the short-term past tend to continue
to outperform other stocks and stocks that performed worst tend to have
one of the lowest returns in subsequent months. We find that strategies based
on buying past winners yield statistically significant positive abnormal returns.
Furthermore, we find that all the three models are incomplete descriptions of
expected returns, since they leave a large part of abnormal profits unexplained.
This supports the notion that momentum existence can be explained by behavioural
models rather than by risk-based stories.
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