price observations were replaced with the price of the last observed trade.
Upon reflection, it was clear that both the unconditional mean approach and
the regression approach would almost certainly be plugging a missing value at
time t using information that would only become available in future periods.
For this reason it was decided to stick with the simple approach to dealing
with missing values in the computation of the returns to the momentum
strategy and thus make the investment strategy more realistic. Of course, the
liquidity criterion was designed to mitigate the effect of these missing price
records when constructing the portfolios.
Stock exits
Over the period covered by the sample, a substantial number of stocks were
delisted and exited the database. To avoid the effects of survivorship bias, HP
assumed that any such occurrence resulted in a 100 per cent capital loss for
shareholders. The AGSM database now includes more information on reasons
for stock exits and it became apparent during the course of the current
research that the assumption made by HP may have been too extreme.
Circumstances in which a full capital loss would not be warranted include, but
are not limited to: mergers or acquisitions resulting in a named stock ceasing
to exist; failing to meet ASX listing requirements; and equity reconstructions.
As a consequence, zero loss is inferred for exiting stocks. Although this
assumption is also rather extreme, some experimentation shows that although
the treatment of existing stocks does affects the level of momentum profits, it
does not change the overall pattern of average holding returns or the main
conclusions of the paper.
Short selling
As pointed out by Demir et al. (2004), momentum strategies documented in
the literature tend to ignore the implications of any short-selling restrictions
that investors must face when dealing on the ASX. HP do not take account
of these obstacles and this convention is maintained in the current research.
This assumption may be rationalised on a number of grounds. First, it makes
the current work directly comparable with the previous paper. Second, and
perhaps more important, the focus of the research is on the search for robust