Testing and Analyzing the Momentum Anomaly in the Egyptian

Stock market: MV versus SD Approach

Guidelines for the Methodology and Data Analysis
Data Analysis of the work shall consist of two main parts as follows
First : Analysis of the Momentum Anomaly (Returns) in the
Egyptian Stock Market using the MV Approach.
! Testing the e"istence of the Momentum anomaly for the #hole period
from $$%&&' till ($)$%&(!
The Jagadeesh and Titman's (1993) approach is taken to identify the winner
and the loser portfolios according to their past monthly returns !e in"estigate
the profits of momentum across "arious lengths of formation and holding
hori#ons Different hori#ons for the formation period ($%1& 3& '& 9& 1(&) and the
holding period ()%1& 3& '& 9& 1() are chosen
To increase the power of the tests& the e*amined strategies include portfolios
with o"erlapping holding periods And to reduce price pressure and lagged
reaction& the trading strategies are constructed +y skipping one month
+etween the formation periods& and +etween formation period and holding
period (Jagadeesh and Titman 1993, -hou& !ei& and -hung& (../)
To a"oid costly monthly re+alancing& a +uy0and0hold method is used 1nce
holding period returns are computed& they are transformed into a"erage
monthly returns to facilitate direct comparison +etween strategies with
different holding hori#ons The choice of the formation ($) and the holding
period ()) is purely su+2ecti"e
3aired T0 Test is used to determine if the momentum profits in the holding
periods are significantly different from that in the formation periods 4f there is
e"idence of momentum profit in the stock market& the winner0loser portfolios
will generate significant a+normal profits
Value weighte !ortfolios shall +e formed using the 5arket
-apitali#ation for each stock so that to ensure that if momentum e*ists it is not
due to the small si#es stocks found in our sample !e shall use the
methodology regarding this step used in the following article
$i"e 6uintile portfolios are formed The top 6uintile portfolio is called the
7!inners7 6uintile and the +ottom 6uintile is called the 78osers7 6uintile
!here the num+er of stocks is not perfectly di"isi+le +y 9& :e*tra; stocks are
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assigned to the middle portfolio (portfolio 3) to ensure the winner portfolio (1)
and the loser portfolio (9) ha"e the same num+er of stocks
<e*t& an "alue 0weighted a"erage return for each 6uintile portfolio o"er the
ne*t )0month holding period is computed 4n each month t& the strategy +uys
the winner portfolio and sells the loser portfolio& holding this position for )
months 4f the a"erage return of the winner portfolio during the )0month
holding period is higher (lower) than that of the loser portfolio& the outcome is
momentum
Do Momentum and *ontrarian +rofits E"ist in the Egyptian Stock
Market,
Elsayeda A-del./attah 0smail
Ta+le <o 9 3age 99
=se the same steps mentioned on 3age 99 +ut use the market -apitali#ation
in sorting the 9 6uintiles or 3ortfolios ( !inners and losers ones ) and in
order to calculate the 5omentum monthly return (computed in the e*cel
sheets) shall +e used
The a"erage monthly log returns for the >gyptian ?tock >*change firms are
calculated to the e6uation @ At % 8og (3t B 3t01) from the $C) strategies
where $ stands for the num+er of months included in the formation period and
) denotes the length of the holding period
3ortfolios are re+alanced e"ery ) period Dased upon total past returns during
$0months& securities are ranked into 9 "alue0weighted portfolios (in
descending order) with the top one called winners and the +ottom one losers
The ta+le also shows the a"erage returns for winners minus losers T0
statistics are presented in parentheses& with one& two or three asterisks
indicating significance at the 1E& 9E and 1.E le"els respecti"ely 5omentum
profits are reported in the +old cells
<ote ( our analysis will co"er only 1( months as contrarian anomaly is not
under study)
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#.$ Testing the 1isk 2ased source and E"planation for the Momentum
Anomaly for the #hole period from $$%&&' till ($)$%&(! ( %A!M analysis).
To see how well -A35 model e*plains the momentum returns& simple
regression tests are performed The e*cess returns of the momentum
strategies are regressed on market risk premium "aria+le in all formation and
holding hori#ons&
4n addition to the regress of the e*cess returns of all winner and loser
portfolios on market risk premium for all hori#ons
Aegression tests are measured +y the Alpha coefficients and portfolios'
sensiti"ities to the market risk represented +y the Deta coefficients 4f a pricing
model is a good description of portfolio returns& one e*pects to see Fero or
low Alphas and significant positi"e Detas
!e shall use the methodology regarding this step used in the following article&
+ut also instead of e6ually weighted 3ortfolios we shall use "alue weighted
ones as pre"ious
Do Momentum and *ontrarian +rofits E"ist in the Egyptian Stock
Market,
Elsayeda A-del./attah 0smail
Ta+le / G 3age '(
!( Testing the Effect of the /inancial *risis on the Momentum +rofits
?u+ period (A) shall +e constructed co"ering the period from 1B1B(..9 G
31B1(B(../( to test the momentum profit trading strategy in normal economic
condtion)
?u+ period (D) shall +e constructed co"ering the period from 1B1B(..H G
31B1(B(.1. (after the financial crisis G to report if there is an effect of the >IJ
due to the -risis on 5omentum returns across "arious $ormation and )olding
periods
=sing the same steps and methodology a+o"e to test the effect of the
$inancial crisis on the 3rofita+ility of the 5omentum trading ?trategy +y
e*amining the effect +efore and after the -risis ( using the Kalue weighted
3ortfolios too ) T0 Test is also re6uired for each ?u+ period
!3 Testing Market State Effects on Momentum 1eturns
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!e e*amine whether conditioning on the state of the market is important to
the profita+ility of momentum strategies !e define two states@ (1) L=3M is
when the lagged three0year market return is non0negati"e& and (() LD1!<M is
when the three0year lagged market return is negati"e
?u+ 3eriod (A) (D) and (-) shall report momentum returns following 3'0 (N0
1( months =p and down markets o"er the period from 1B1B(..9 G 31B9B(.13
?u+ 3eriod (D) (>) ($) shall +e constructed co"ering the period from 1B1B(.11
G 31B9B(.13 to report momentum returns following 3'0 (N0 1( months =p and
down markets o"er that period in particular
All returns are reported in per cent and t0statistics also should +e pro"ided in
each ta+le
Note : You can refer to the following article as a general guideline
(Momentum Returns, Market States and the 2007 Financial risis
M!"#MM#$ #"M#$ "%%M# &'()%R* +, N#R*%#- in this ste. anal/sis ,
!' Analysing the 0ndustry Momentum
The 4ndustry 5omentum is analy#ed with a +it different methodology used in
the a+o"e points (11 01N) as the 4ndustry 5omentum portfolios are formed
+ased on 80 months lagged returns and held for ) months !here 8 % 1 & '&
1(& month lagged returns and ) % 1& '& 1( & (N& 3' months holding period
strategies
$irst an e6ually weighted 3ortfolios method shall +e used ( for the whole
panel data 0(..90(.13)
!hile the !inners 3ortfolios is the e6ually Gweighted return of the highest 3
momentum industries& the losers 3ortfolios is the e6ually weighted return of
the lowest three momentum industries
!O8 presents the 4ndustry 5omentum retruns <o middle 3ortfolios is
calculated
3anel (A) shall +e constructed to report the 4ndustry momentum profit& +ut a
month shall +e skipped +etween the portfolio formation and holding periods to
a"oid +id and +ounce effect
?econd a decomposition of the 4ndustry 5omentum profits into "arious
components retlated to si#e and dollar trading "olume shall +e calculated for
the period +etween 1B1B(..9 G 31B9B(.13
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3anel (D) reports profits for the largest and smallest (.E of stocks +ased on
market capitali#ation (si#e) ?pecifically the 3 4ndustries that performed +est
and the 3 three performed the worst at time are selected
3anel (-) reports the 5omentum returns according to the sort of portfolios
+ased on Kalue Traded stocks
5ethodology used in the following article shall +e used for the analysis of
5omentum 4ndustry ( 2ust refer to the following pages only )
Do 0ndustries E"plain Momentum,
To-ias 4! Mosko#itz5 Mark Grin-latt
Ta-le 000 6 +age %7&
Ta-le V 6 +age %77
Ta-le 0V 6 +age %7'
&ypotheses of the Stuy (!art ')
",0, *he momentum1under reaction h/.othesis: %2treme mo3ements in .ortfolio
return will 4e followed 4/ su4se5uent return mo3ements in the same direction,
",2 *he 4eta risk cannot e2.lain the momentum .rofits in %&67 there is a4normal
return and no risk differential 4etween the winners and losers .ortfolios,
",8, Momentum strategies generate .ositi3e .rofits following u. states and negati3e
following down states market,
",9, Momentum rashes has no effect on momentum returns in the %&6,
",:, 'ndustries e2.lain Momentum Returns and ;rofits in the %&6,
0mportant 8otes
The closing prices of indi"idual stocks are downloaded from 5etastock
data+ase
The returns at time (t) were computed as the natural logarithm of the
indi"idual stock prices (3)& that is@ At % log (3t B 3t01)P1..
This study uses log returns rather than raw returns& +ecause the results using
raw return in estimating portfolio performance suffer from measurement errors
()on Q Tonks& (..()
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4n addition& the monthly treasury +ill rate is downloaded from the -entral Dank
4n sum& positi"e and negati"e monthly returns are used to form different
winners& losers& Fero momentum (winners0 losers) and Fero contrarian
(losers0winners) portfolio
All data files are prepared and uploaded for the data analysis purpose
?ample for the study is found in the e*cel sheets 5onthly returns ha"e +een
calculated so no need to redo this step
5arket Aisk 3remium ( 5arket Aeturn G Aisk $ree Aates) are also calculated
for the whole panel data and found in the e*cel sheets
8agged 5arket Aeturns are (3'& (N& 1() are also calculated and shall +e
uploaded to you too
All 5arket -apitali#ation data is found under the files called Dulletin(+etween
33N 09')
Dulletin files include so many stocks data that shall not +e included in our
study e*cept for the stocks only listed in the e*cel sheets ( ranging from 19.
to (.. stocks during the whole period
Secon : Analysis of the Momentum Anomaly (Returns)
in the Egyptian Stock market using the S( Approach
=nder preparation
To +e deli"ered soon
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