Momentum Effect: Evidence from Emerging Capital Market of Pakistan

Abstract

The objective of this study is to investigate the existence of momentum effect in Pakistan stock exchange (PSX). CAPM and Carhart four factor model is applied for risk factor analysis with regard to momentum. This study has analyzed 25 momentum strategies with the help of decile partial rebalancing and equal weighted techniques. Six years monthly data of 83 firms from PSX-100 Index from 2009 to 2014 is used for analysis for CAPM. For Carhart 4 factor model and for the momentum we have taken 190 non-financial firms from PSX all listed firms. We have selected 6x6 strategies for our study to check whether there exists any momentum effect in it or not. For Carhart, we have taken additional 3 factors known as HML, SMB, and MOM. We have applied the CAPM model for momentum on 6x6 strategies and the result found that the return is due to systematic risk not by manager performance. After running the tests, very mild momentum was seen which we have neglected. Only 3 strategies of 25 have shown momentum, which also confirms that by taking ranking period short and holding period long will give investors significant abnormal return, it also proves the absence of momentum effect in PSX.