1. INTRODUCTION
Jegadeesh and Titman (1993, 2001) demonstrate that for US stocks, over an
intermediate investment horizon of three to twelve months, a momentum
investment strategy, defined as buying stocks whose immediate past
performance is good (“winners”) and selling stocks whose immediate past
performance is poor (“losers”), is a profitable one. Since this influential work a
number of other studies have confirmed and extended this result. Moskowitz
and Grinblatt (1999) show that momentum exists in industry-based portfolios
while Llewellyn (2002) demonstrates that momentum is also present in size
and book-market sorted portfolios. Grundy and Martin (2001) take a longer-
term historical perspective and show that a momentum strategy has been
profitable in the US since the 1920s. There is thus a solid body of literature
documenting that momentum is a robust and pervasive feature of US stocks
and there is emerging evidence (Rouwenhorst, 1998) to suggest the presence of
momentum in European markets.
In a previous paper, Hurn and Pavlov (2003) (HP hereafter) provide empirical
evidence in support of the profitability of a momentum investment strategy in
Australia by examining the returns of the largest 200 stocks by market
capitalization listed on the Australian Stock Exchange (ASX) for the period
December 1973 to December 1998. The evidence in favour of momentum in an
Australian context is further strengthened by the favourable momentum
results reported by Demir, Muthuswamy and Walter (2004) for the period
1990 to 2001 and Marshall and Cahan (2005) for the period 1990 to 2003.
This paper revisits the results reported by HP to test the robustness of their
conclusions. The motivation for this endeavour stems mainly from the
argument of Sullivan, Timmermann and White (1999) who point out that
data-snooping is a major factor encountered yet overlooked in a large body of
the literature on the profitability of technical trading strategies. It is
potentially important therefore to ascertain whether or not the momentum
profits reported by HP are robust to this kind of reality check.