Momentum in Australian Stock Returns: An Update

This paper tests the robustness of HPs conclusions by updating the research
in two ways. First, the period of the stock returns data is expanded so that
the sample on which the analysis is conducted now covers the period
December 1973 to December 2004. The period 1998 to 2004 includes a period
of strong growth in stocks worldwide and also a period of turbulence known as
the “dotcom” bubble. Second, unlike the original HP paper, the current
study is not limited to the largest 200 stocks by market capitalisation listed
on the ASX. HP motivate the decision to limit the scope of the empirical
analysis to large stocks by appealing to the fact that smaller stocks tend to be
hampered by low liquidity. Rather than assuming that liquidity correlates
strongly with size, the approach adopted here is aimed more directly at the
liquidity problem. Specifically, the empirical analysis is conducted on the
largest possible set of stock returns that satisfy a number of liquidity
conditions.

The rest of the paper is structured as follows. Section 2 describes the dataset
employed and Section 3 deals with various methodological points related to
the construction of the momentum portfolios, including a discussion of the
liquidity conditions used in their construction. In Section 4 the results
obtained from implementing a momentum investment strategy with
Australian stocks are presented. Conclusions and suggestions for further
research are contained in Section 5.

2. DATA

The data are taken from the AGSM database containing monthly
observations on prices, returns, dividends and capital reconstructions for all
stocks listed on the ASX. The analysis is performed on simple monthly returns
defined as the sum of the capital gain and dividend yield, taking into account
any capital reconstructions.²

² The variable “price relative” in the AGSM database.

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