Momentum effect on the Russian stock market. Whether emerging markets are not profitable for Momentum Strategies

Our study examines whether price momentum strategy (cross section momentum effect on longshort portfolios) can be profitable on Russian stock market. We testing the statistical significance of zero cost portfolio excess returns. Our sample covers the period from 2004 to 2013 capturing different states of Russian economy. We implement relative strength strategy with 10% quantile to construct equal-weighted 16 portfolios with different analysis and holding windows. Consistent with Jegadeesh and Titman (1993), monthly portfolio returns are calculated on an overlapping holding period basis. Our testing gets some recommendations for investors. Firstly, investor may get successful results (1.5% excess monthly return) buying 3-month past “winners” and selling 3-month past “losers” and holding such portfolios for 3 months during the whole period from 2004 to 2013. Secondly, momentum strategy generates losses during the periods of crisis (due to past “winners”) and recovery (due to past “losers”). Thirdly, investor can increase the trading results by selling past medium – term “winners” and buying past medium – term “losers” with average monthly excess return about 1.2-1.7%. In the pre-crisis period the performance of momentum strategy is the best in comparison with other states of economy. We show that momentum effect is stronger with liquid stocks of large capitalization companies. The seasonal effect (January effect) is significant to build momentum strategies in Russian stocks. In addition, our paper examines the impact of total transaction costs on momentum strategies. We obtain that losers have substantially higher transaction costs than winners what is typical for emerging markets. Nevertheless, buying past winners (with consideration of transaction costs) allows beating the market during the whole analyzing period. JEL classification: G11; G12; G14