Assessing momentum investment strategies in the U.A.E. Stock Market

摘要

The thesis extends the research in the area of momentum strategies by investigating the short-term continuation for stocks listed in the United Arab Emirates (U.A.E.) Stock Market over the period from January 2001 to June 2006. The evidence shows that winner portfolios tend to outperform loser portfolios of stocks over pre- and post-formation periods of three months to twelve months. The most successful zero-cost trading strategy selects stocks based on their returns over the previous six months and then holds the portfolio for eight months. This strategy yields abnormal returns of 1.10 percent per month, which is very close to the profits reported by Jegadeesh and Titman (1993) in the US market.The thesis continues by looking at possible explanations of momentum profits by investigating whether they can be explained by the firm size effect or book-to-market effect. The empirical results provide evidence that small-stocks exhibit a greater return than big-stocks over various holding periods, but that the difference between high B/M-stocks and low B/M-stocks is not as effective in producing abnormal returns.In order to achieve a deeper understanding of the linkages between these variables and momentum profits, I propose a multiple model of risk valuation that extends both the CAPM and the Fama and French (1992, 1993) models, by introducing a new model that assumes that momentum is explained by the sensitivity of stock returns to four-factors; market beta, firm size and book-to-market, and in addition to the oil price factor.The evidence suggests that the relationship between momentum return and the market risk and book-to-market factors is insignificant, which means that these factors are unable to explain the performance of the momentum returns, while it is positively correlated with the firm size factor and the changes in the oil price factor.These findings motivate taking a closer look at the causes behind the momentum returns. A survey questionnaire is carried out to acquire more knowledge of the momentum effect, and to identify further possible explanations of momentum in stock returns. The results from the survey questionnaire reveal that investors’ decision-making appears to be influenced by a number of factors other than fundamental factors, such as recent price movements in a stock, market rumors and friends/family opinions. The questionnaire results lead to additional insights into thecauses of the momentum phenomenon.