Authors: Aristotelis Vaitsidis, Athanasios Fassas

Title: Traces of Momentum Factor in Emerging Markets Using Sharpe Ratio

Abstract

This dissertation was written as part of the MSc in Banking and Finance at the International Hellenic University.

Economists and investors had always tried to predict future stock movements based on past information. However, the theory of the Efficient Market Hypothesis suggested that the market follows a random walk and thus that it is impossible to predict future stock prices based on past information. It wasn’t until the 90’s that theories such as the momentum became popular.

This study searches the existence of momentum evidence in three emerging markets. Data from Brazil, China and South Africa were used and portfolios of “winners” and “losers” were created. The basis of this research has been the work of Jegadeesh and Titman (1993), which proved the existence of momentum effects in the U.S. market.

The questions that this study aims to answer is if there any momentum traces in the countries under examination, if the strategies are profitable and if the portfolios present better results when composed of from companies of one country or mixed.

The procedure to determine if there is evidence of momentum is done by a comparison of the Sharpe Ratio of the portfolios and the Sharpe Ratio of the main stock indices in these countries per month and then we determine the number of months that the portfolios outperformed.

Results showed that although there is some evidence of momentum in these markets, when going long the “winners” they were proven to be statistically insignificant. On the other hand, significant results when shorting the “losers” proved that there is no momentum evident in this strategy.

Keywords: Momentum, Sharpe Ratio, long selling, short selling, efficient market