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MOMENTUM RETURNS: A PORTFOLIO-BASED EMPIRICAL STUDY TO ESTABLISH EVIDENCE, FACTORS AND PROFITABILITY IN INDIAN STOCK MARKET

The study attempts  to confirm the existence of any portfolio-level returns resulting from  momentum-led investments in the Indian equity market. The study also examines and establishes the contribution made by the macroeconomic-specific and portfolio-specific variables in the generation of abnormal returns. The main objective of the study is to make a short-term trader or a long-term investor realise the benefits of momentum trading, and enable a wider acceptance of the technique in designing trading or investment strategies.

The authors use the vector autoregressive (VAR) methodology to test and confirm the momentum effect in the Indian market; the study constructs long-term and short-term winners’ and losers’ portfolios and identifies the extra-normal profits in the portfolios. The abnormal profits are further decomposed into the time-series, cross-sectional and lead-lag components. The authors find evidence of portfolio-level extra-normal profits which are comparable in nature to the momentum returns documented by Jegadeesh and Titman (1993) for the United States. The VAR model found price–earnings ratio, price–book ratio and net foreign institutional inflows to be the momentum-generating factors in the Indian context. Furthermore, the decomposition of abnormal returns indicates that the time-series pattern contributes highest to the momentum profit.

The findings of the study provide insights to portfolio managers to explore momentum as a concept in designing portfolios. The study throws light on the existence of portfolio-level momentum returns in the Indian market and identifies the factors resulting in the abnormal returns. In addition, the study decomposes momentum-led profits to empirically confirm any contribution due to cross-sectional risk, effects arising due to lead-lag relationships, and time-series pattern. The paper also discusses the managerial implications and implications for possible policy formulation for a better buy-in and wider out-reach of this technique.