The Asymmetric Effect of Comovement in Style Investing on Momentum Strategy

• Main Authors: Han-Ting Kang, 康涵亭
• Other Authors: Miao-Ling Chen
• Format: Others
• Language: zh-TW
• Published: 2018
• Online Access: http://ndltd.ncl.edu.tw/handle/g4bm23

碩士 === 國立中山大學 === 財務管理學系研究所 === 106 === To allocate assets more efficiently, many investors will choose style investing as their investment strategy. Wahal and Yavuz (2013) indicate that style investing can increase comovement between stocks, and evidence that there is return predictability of comovement in style investing on momentum. The style investing not only simplifies investment decisions, but also effectively improves the performance of the portfolio. Therefore, comovement between stocks increases through an increased trading on style stocks. However, prior literature shows that the momentum has asymmetric impact pattern in different market states. In this study, therefore, we implement multivariate Markov switching model with time-varying regime transition probabilities and use VIX for modeling the time-varying transition probabilities of the regime-switching process to capture the changes in the investor sentiment state. Our empirical results are as following: 1. Investors are trading more on style investing stocks following the high return of style investing. Consequently, style investing stocks have the positive impact on stock returns. The return predictability of style investing is stronger in the holding period 3 month, and monotonically decreases from holding period 6 to 12 month. This result implies that the return predictability of style investing is outperformance in the short-term. 2. The prices of style investing stocks rise following higher inflows, leading to strength momentum effect. Specifically, stocks with higher comovement are associated with the higher momentum effect. Accordingly, high comovement momentum earns higher momentum profit during holding period 3 and 6 months. On holding period 12 month, the momentum effect is significantly reversal following decreasing in the level of overconfident. 3. The level of overconfidence is increasing following optimistic growing, and leading to investors demand more on style investing stocks, thereby strengths momentum effect. Momentum on high comovement earns significantly profit during holding period 3 and 6 months, either in the optimistic or pessimistic state. On holding period 12 month, momentum on high comovement keeps significantly profit in optimistic state. In contrast, on holding period 12 month, the momentum effect has significantly negative in pessimistic state. This result indicates that the comovement in style investing has asymmetric impact pattern on momentum. In sum, the momentum profit during optimistic state is more persistent than during pessimistic state.