Do momentum strategies work? Australian evidence

Abstract

Purpose - The purpose of this paper is to investigate the profitability of momentum investment strategy and the predictive power of trading volume for equities listed in the Australian Stock Exchange. Design/methodology/approach - Following the Lee and Swaminathan's approach, portfolios on past returns and past trading volume is constructed. In this approach, all stocks are ranked independently on the basis of past returns and past trading volume. The stocks are then assigned to one of five portfolios based on past returns and one of three portfolios based on trading volume over the same period. Findings - A strong momentum effect for the Australian market during the period 1988 through 2002 is observed. Further, momentum plays an important role in providing information about stocks. Past trading volume appears to predict both the magnitude and persistence of price momentum. Research limitations/implications - Substantial momentum observed in monthly stock returns has investment implications. Abnormal returns vary from 0.3 to 7 per cent per month in the intermediate horizon. Originality/value - 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.