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Do Momentum Strategies Work?: - Australian Evidence

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  • Michael E. Drew
  • Madhu Veeraraghavan
  • Min Ye

Abstract

This paper investigates the profitability of momentum investment strategy and the predictive power of trading volume for equities listed in the Australian Stock Exchange. Recent research finds that momentum and trading volume appear to predict subsequent returns in U.S. market and past volume helps to reconcile intermediate-horizon “under reaction” and long-horizon “overreaction” effects. However, bulk of the evidence on this important relationship between past returns and future returns is limited to U.S. portfolios. This study provides an out of sample evidence by examining the relationship between “trading volume” (measured by the turnover ratio) and “momentum” strategies in an Australian setting. We document a strong momentum effect for the Australian market during the period 1988 through 2002 and find that momentum plays an important role in providing information about stocks. We also find that past trading volume predicts both the magnitude and persistence of price momentum. In summary, our findings are consistent with the U.S. evidence.

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File URL: http://external-apps.qut.edu.au/business/documents/discussionPapers/2004/DP%20No.%20169%20-%20Drew%20&%20Others.pdf
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Bibliographic Info

Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 169.

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Date of creation: 20 Jan 2004
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Handle: RePEc:qut:dpaper:169

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Web page: http://www.bus.qut.edu.au/faculty/economics/
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  1. Conrad, Jennifer & Kaul, Gautam, 1998. "An Anatomy of Trading Strategies," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 489-519.
  2. Allaudeen Hameed & Yuanto Kusnadi, 2002. "Momentum Strategies: Evidence from Pacific Basin Stock Markets," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 25(3), pages 383-397.
  3. Robert Connolly & Chris Stivers, 2003. "Momentum and Reversals in Equity-Index Returns During Periods of Abnormal Turnover and Return Dispersion," Journal of Finance, American Finance Association, vol. 58(4), pages 1521-1556, 08.
  4. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
  5. Tobias J. Moskowitz & Mark Grinblatt, . "Do Industries Explain Momentum?," CRSP working papers 480, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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Cited by:
  1. Bettman, Jenni L. & Maher, Thomas R.B. & Sault, Stephen J., 2009. "Momentum profits in the Australian equity market: A matched firm approach," Pacific-Basin Finance Journal, Elsevier, vol. 17(5), pages 565-579, November.
  2. Imroze Nandha & Harminder Singh & Randy Silvers, 2012. "Does Momentum Still Exist in the Australian Stock-Market?," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 11(1), pages 89-92, June.

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