The impact of oil price and exchange rate on momentum strategy profits in stock market: evidence from oil-rich developing countries

摘要

The existing literature is still inconclusive on whether momentum exists and whether momentum strategy profits are affected by macroeconomic variables. The aim of the present study is two-fold. First, we examined the existence of the momentum by studying the strategy profits in six oil-rich developing countries in Middle East including Iran, Saudi Arabia, Bahrain, Qatar, the United Arab Emirates, and Kuwait using the double-sort strategies. Our findings show that there is a momentum profit over short-, mid- and long-term periods in all countries. After selecting the best combinations of information sets and holding lengths for each country, by adding the oil price and the exchange rate, and adjusting the models proposed by Chordia and Shivakumar (J Finance 57:985-1019, 2002) and Kim et al. (J Bank Finance 49:191-215, 2014) on the characteristics of oil-rich developing countries, we estimated the impact of macroeconomic variables on the expected momentum profits through a two-state Markov regime switching model under different distributions. The findings indicate that the momentum strategy profits can be explained by a set of lagged macroeconomic variables, especially oil prices and exchange rate. The results show that the winner portfolio has a greater sensitivity to macroeconomic variables than does the loser portfolio in both the expansion and recession states. It is also indicated that both the winner and the loser stocks are riskier in the expansion periods than recession periods. The results indicate that the returns on momentum portfolios react asymmetrically to economic conditions in the recession and expansion states.