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The Arabo-Mediterranean momentum strategies

The Arabo-Mediterranean momentum strategies

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This paper documents strong evidence for the robust profitability of the momentum strategies inter and intra five Arabo-Mediterranean stocks’ markets. Between 1998 and 2007 we find that the related stocks’ returns exhibit a strong continuation pattern during a period of about one year. Even after controlling for the country effect, the neutral-country momentum strategies still yield significantly positive payoffs of about 1.88 percent per month. Nevertheless and although the paper gives evidences that the market and the SMB factors account for the profitability of neutral-country momentum strategies’ payoffs, still some significant parts of the excess returns persist puzzling to the conventional asset pricing models.
This paper documents strong evidence for the robust profitability of the momentum strategies inter and intra five Arabo-Mediterranean stocks’ markets. Between 1998 and 2007 we find that the related stocks’ returns exhibit a strong continuation pattern during a period of about one year. Even after controlling for the country effect, the neutral-country momentum strategies still yield significantly positive payoffs of about 1.88 percent per month. Nevertheless and although the paper gives evidences that the market and the SMB factors account for the profitability of neutral-country momentum strategies’ payoffs, still some significant parts of the excess returns persist puzzling to the conventional asset pricing models.

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Online Publication Date: 10 January, 2012Publisher: Asian Economic and Social Society
 
The Arabo-Mediterranean momentum strategiesFaten Zoghlami
(Finance department, ISCAE University of Manouba,Tunisaia )
 
Citation:
Faten Zoghlami
(2011): “
The Arabo-Mediterranean momentum strategies
Asian Economicand Financial Review Vol.1, No.4, pp.198-205
 
 
 Asian Economic and Financial Review, 1(4),pp.198-205
 
198Introduction
Momentum is one of the strongest and mostpuzzling asset pricing anomalies. Jegadeesh andTitman (1993) show that past 3 to 12 monthsWinners stocks continue to outperform past Losersover the same terms. Momentum is puzzlingbecause it suggests that prices are not even weak-form efficient. For it to be rational, risk would haveto increase after positive returns. EmpiricallyJegadeesh and Titman find that risk adjustmenttends to accentuate rather explain momentum.Moreover, Fama and French (1996) show that manypatterns documented in American stocks returnswere consistent with a multifactor model of returns,but their model fail to explain the medium-termmomentum.Since this continuation pattern has uncovered using
substantially the same database of U.S’ stocks, it
can therefore not be excluded that this apparent andtroubling anomaly is simply the outcome of anelaborate data snooping process. Nevertheless manyother researches document similar continuation
 pattern using many other different stocks’ markets
sample. For example, Rouwenhorst (1998)document a momentum effect at medium horizon in12 different European countries; Foerster and al(1995) provide evidence on momentum strategies in
the Canadian stocks’ market; Griffin, Ji and Martin(2003) found the same stocks’ returns patternwithin a sample of 40 different emerging stocks’
ma
rkets related to 40 countries worldwide….
 This study is further an attempt to address thisconcern by studying medium-term return pattern inthe emerging markets context. This paper focuseson international individual stocks returnscontinuations inter and intra some emergingmarkets using a sample of 540 stocks from fiveArabo-Mediterranean
 
countries from 1998 to 2007.Such study may be useful for two reasons. First itpermits to examine whether the momentum effectwhich seems common to many developed stoc
ks’
markets is also present in the little and emergingArabo-Mediterranean
 
stocks’ markets. If the
momentum effect is asserted to be a general andcommon pattern in stocks returns and none of theconventional risk factor may account for it, then weshould think either of a serious misspecification of commonly used asset pricing models or a generaltendency of markets to underreact to information.Second and upon the Chui, Titman and Wei (2000;
2006) results’ arguing that momentum strategies
usually do not produce significant profits inemerging stock markets, using as sample the Asianstocks markets, it may be interesting to check thisintriguing evidence in another different set of 
emerging stocks’ markets.
 The main revealing findings of the paper are firstand by contrast to Chui, Titman and Wei (2000;2006), the past diversified Arabo-Mediterranean
 
Winners stocks’ portfolio continue to outperform
the past medium-term Losers by about 2percent permonth. This momentum in returns is not limited toa particular market, but it is present in four of thefive markets in the sample. The outperformancelasts for about one year. Second and by contrast tothe US and European Experience, we give evidencethat the market and the size factors may account forthe Arabo-Mediterranean
 
momentum strategies’
profits. Nevertheless these abnormal profits cannotbe totally attributed to the conventional risk factors;since it remain some significant piece that beyondany risk based explanation. The remainingsignificant puzzling part of the momentum
strategies’ payoffs, let us suggesting that the
momentum strategies profitability and since it
seems concerning all the stocks’ markets
regardlessof their respective level of development and thenumber of listed securities neither their respective
The Arabo-Mediterranean momentum strategiesAbstractAuthor (s)Faten Zoghlami
Doctor and Assisatnt professorFinance department, ISCAE University of Manouba, Tunisaia 2010Faten.zoghlamishili@yahoo.fr 
Key words:
 
momentum strategies, Arabo-
Mediterranean stocks’ market, CAPM and
three-factor model of Fama and French (1996).
 
This paper documents strong evidence for the robust profitability of the momentumstrategies inter and intra five Arabo-
Mediterranean stocks’ markets. Between 1998and 2007 we find that the related stocks’ returns exhibit a strong continuation
pattern during a period of about one year. Even after controlling for the countryeffect, the neutral-country momentum strategies still yield significantly positivepayoffs of about 1.88 percent per month. Nevertheless and although the paper givesevidences that the market and the SMB factors account for the profitability of neutral-
country momentum strategies’ payoffs, still some significant parts of the
excess returns persist puzzling to the conventional asset pricing models.
 
The Arabo-Mediterranean momentum strategies
199
transaction volumes is driven by some common
factors that are equally present in all the stocks’
markets. We suspect especially that the humanbehavior of investors as the searched commonfactor between all the developed and emerging
stocks’ m
arkets.The remainder of the paper is organized as follows.Section 2 describes the sample and documents theprofitability of medium-term internationalmomentum strategies. Section 3 shows thatmomentum is not restricted to stocks of a particularcountry category. Section 4 examines whether thereturns to momentum strategies can be explained bythe conventional asset pricing models. Section 5concludes the paper.
Arabo-
Mediterranean momentum strategies’
returns
The sample consists of monthly returns in localcurrency for 540 firms from five Arabo-Mediterranean
 
countries from 1998 to 2007:Morocco (77 firms), Tunisia (50 firms), Egypt (200firms), Jordan (200 firms) and Lebanon (13 firms).All returns are converted to US dollar usingexchange rate taken from Financial Times.The momentum strategies are constructed as inJegadeesh and titman (1993). At the end of eachmonth, all stocks with a return history of at least 12months are ranked into deciles based on their pastJ-month return (J equals 3, 6, 9 or 12). The firstdecile regroups the lowest past performance or theLosers portfolio and the tenth decile regroups thehighest past performance or the Winners portfolio.These portfolios are equally weighted at formation,and held for K overlapping subsequent months (Kequals 3, 6, 9 or 12 months) during which time theyare not re-balanced. That is in any given month t,the strategies hold a series of portfolios that areselected in the current month as well as in theprevious K-1 months, where K is the holdingperiod. The paper follows Jegadeesh and Titman(1993) who report the monthly average return of Kstrategies, each starting one month apart. This isequivalent to a composite portfolio in which, eachmonth 1/K of the holdings, are revised. Forexample, toward the end of month t, the J=6, K=3portfolio of Winners consists of three parts: aposition carried over from an investment of oneUSD at the end of month t-3 in the 10percent firmswith highest prior six-month performance as of t-3,and two similar positions resulting from a unit USDinvested in the top performing firms at the end of month t-2 and t-1. At the end of month t, the first of these holding positions will be liquidated andreplaced with a unit USD investment in the stockswith highest six-month performance as of time t. Ineach month t, the strategy J/K buys the past J
 – 
month Winners portfolio and sells the past J-monthLosers portfolio, holding this position for Kmonths. In addition, the strategy closes out theposition initiated in month t-K. Hence, under thistrading strategy we revise the weights on 1/K of thestocks in the entire portfolio in any given monthand carry over the rest from the previous month.In addition, we examine a second set of 16strategies that skip a month between the portfolioformation period and the holding period. Byskipping a month, we avoid some of the bid-ask spread, price pressure and lagged reaction effectsthat underlie the evidence documented in Jegadeesh(1990) and Lehman (1990).Table 1 presents the average monthly returns of relative strength portfolios. Especially it gives thedifferent payoffs of the Buy and Sell portfolios aswell as the zero-cost, Winners minus Losersportfolio between 1998 and 2007, for the 32strategies described above.The portfolio in Panel A are formed at the end of the performance ranking period. But panel Breports the average returns if the portfolio formationis delayed relative to the ranking period by onemonth. Panel A and panel B, both show that foreach couple of ranking and holding periods (Jmonths; K months) the equally-weighted portfolioformed from the stocks in the bottom decile of previous J months is usually less successful than thetop decile portfolio, letting all the explored 32momentum strategies profitable. Moreover theArabo-Mediterranean
 
strategies seem stronger andmore profitable than those documented in the US
and European stocks’ markets, since they yields on
average 2.52percent per month (2.406
1
percent permonth with delayed holding period compared toabout of 0.95percent in the US Jegadeesh andTitman (1993) and 1.16percent the European(Rouwenhorst (1998) experiences).Hence this paper gives evidences against the Chui,
Titman, and Wei (1998; 2006)’ findings that argue
that momentum strategies usually do not producesignificant profits in emerging stock marketsSimilar to all previous finding (Jegadeesh andTitman (1993; 1999); Rouwenhorst (1998)), themost successful Arabo-Mediterranean
 
zero-coststrategy also selects stocks based on their returnsover the previous 12 months and then holds theportfolio for 3 months. This strategy yields 3.57percent per month (shown in panel A)
1
 
We notice that the strategies that skip one month between theholding and the ranking periods yields less profits. This may bebecause of the relative dispel of the glorious ex-Winnersportfolios within this skipped month.
 

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