Do Momentum Strategies Work?: - Australian Evidence, Discussion Paper No 169

Abstract

This paper investigates the profitability of momentum investment strategy and the predictive power of trading volume for equities listed in the Australian Stock Exchange. Recent research finds that momentum and trading volume appear to predict subsequent returns in U.S. market and past volume helps to reconcile intermediate-horizon “under reaction‿ and long-horizon “overreaction‿ effects. However, bulk of the evidence on this important relationship between past returns and future returns is limited to U.S. portfolios. This study provides an out of sample evidence by examining the relationship between “trading volume‿ (measured by the turnover ratio) and “momentum‿ strategies in an Australian setting. We document a strong momentum effect for the Australian market during the period 1988 through 2002 and find that momentum plays an important role in providing information about stocks. We also find that past trading volume predicts both the magnitude and persistence of price momentum. In summary, our findings are consistent with the U.S. evidence.