Academic journal article International Review of Management and Business Research

Evidence of the Momentum Effect in the Morocco Stock Market: 1995-2014

Academic journal article International Review of Management and Business Research

Evidence of the Momentum Effect in the Morocco Stock Market: 1995-2014

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

The existence of the profitability of momentum strategies is well documented in the literature and has attracted the attention of many academics. The empirical literature on momentum strategies has showed that buy the best performance stocks and sell the worst-performing ones during intermediate horizon past performance 3, 6, 9 and 12 months and hold the portfolio for the following 3, 6, 9 and 12 months can be used to predict future returns and it provides significant profits at firm, industry and international index level.1

Nagel (2001) shows a momentum effect in the UK market that is cannot be explained by the Fama and French model. Hurn and Pavlov (2003) find evidence of short to medium momentum effects in the Australia market. These effects are declined by the risk adjustment only over the short term. Using daily, weekly and monthly data for 18 developed countries, Patro and Wu (2004) examine the momentum strategies. They demonstrate statistical and significant profits.

Using monthly index returns of 17 countries, Huang (2006) measures the source of momentum profits. Huang (2006) shows that the "up" market play crucial role in generating the momentum pr ofits. Naranjo and Porter (2007) investigate the existence of momentum profits in both developed and emerging markets. Their findings provide strong evidence of momentum effect in both markets and find that momentum strategies that vary inter-countries show a lower risk and higher returns.

Recently, using international indices in both developed and emerging markets, Bornholt and Malin (2011) investigate whether each index's recent volatility considerations can be employed to enhance the profitability of the standard momentum approach. Double-sorting procedure has been used in their paper. Bornholt and Malin (2011) find that the momentum/volatility strategy provide only small enhancements over pure momentum in the case of developed markets, whilst the new strategy performed surprisingly well when applied to emerging markets. Recent high volatility winners were superior to recent low volatility losers on an average annualized basis by 17.4%. On the other hand, the long portfolio of the pure momentum strategy was superior to the short portfolio by 9.1%. Furthermore, for the case of emerging market, they showed that high volatility winners achieve an average annualized return of 28.3%, and an alpha of 21.1%.

Wang and Wu (2011) present a new effort to discover momentum sources through the risk adjustment of momentum portfolios. Whilst most previous studies follow a new equilibrium model to adjust for risk, Wang and Wu (2011) concentrate on the most extensively used linear three-factor model by proposing an alternative risk adjustment procedure. They challenge the main idea in the literature that indicates momentum profits are drawn by firm-specific components of stock returns. This leading view infers that the winning portfolios are no riskier than the losing portfolios and that the risk-adjusted momentum returns continue to be significant. Wang and Wu (2011) show that it is not useful to employ the conventional procedure of risk adjustment by running the full-sample time-series regression of momentum portfolio return on the Fama-French three-factor model to capture the risk-adjusted momentum returns, since this procedure does not take into consideration the dynamic nature of the factor loading of momentum portfolios. They found that approximately 40% of momentum profits drawn by individual stocks can be explained by the three-factor model after adjusting risk related to the Fama-French three factors for momentum portfolio.

More Recently, looking at the Middle East region, in particular the Jordan firm market, Gharaibeh (2015) finds that although the momentum strategy does not work in Jordan firm market returns, the large-sized momentum strategy is profitable and statistically significant. …

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