Amanpreet Singh Dissertation

Using momentum trading strategy to beat the UK
stock market: A challenge to the Efficient Market

Hypothesis
Amanpreet Singh
UP687606
Supervised by Lena Itangata
This dissertation is submitted in part fulfilment of BA(Hons)

Accounting with Finance
March 2017
Accounting and Finance Dissertation (U21079) Student ID: UP687606
Declaration of originality
I, the undersigned, declare that this dissertation is my own original work. Where I have taken
ideas and/or wording from another source that is explicitly referenced in text.
I give permission that this dissertation may be copied and made available through the
university library, in printed form and/or electronic form.
I provide a copy of the electronic source from which this dissertation was printed. I give my
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necessary to fulfil the requirement of the University of Portsmouth Regulation, Procedures
and Codes of Practice.
Word Count: 9,808 (excluding bibliography/references, notes, appendices, cover pages,

acknowledgements and abstract.)
Signed:.. Date:..
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Acknowledgements
I faced a number of challenges during the dissertation topic, but with the constant support of
the people around me, this gave me the motivation and drive to keep going forward, and give
it my best.
Firstly, I owe my deepest gratitude to my parents, immigrants from India who settled down in
the UK in the 80s. They are both my biggest role models, hearing their stories about their
initial struggles, and the hard work they both put in on a daily basis to be where they are
today. And without them, I wouldnt be where I am today, being the first in the family to go
to University, I hope I can make them proud.
I would like to give my biggest thanks to my Supervisor Lena Itangata, for her guidance,
encouragement and supervision and support of my dissertation topic, without her guidance,
this research study would never have been completed.
I would also like to thank Louisa Burton, for her support and guidance throughout the year,
and I would also like to thank Shaling Li, for her initial support and guidance.
Also, I heartily thank Gurinder Kaur for her continuous support throughout my final year at
the University of Portsmouth.
Lastly, I offer my regards to all the academic staff at the University of Portsmouth, who have
thought me all the theory regarding accounting and finance, whilst also keeping the course
interesting and meaningful, which will help shape my future career.
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Abstract
A number of studies have illustrated that stock returns may be predictable through
implementing a momentum trading strategy, which contradicts the whole concept of the
Efficient Market Hypothesis. This paper will discuss the Efficient Market Hypothesis and
focus on its challenges in the face of behavioural finance. In addition, empirical research is
conducted to test whether a momentum strategy can be implemented to successfully beat the
market. This paper draws on the framework developed by Jegadeesh & Titman (1993), while
also taking ideas from other relevant scholars in the field, and analyses the monthly returns
generated from the momentum strategy used, examining whether the returns in each
constructed portfolio is greater than the return of the UK stock market (FTSE All-Share
market index) for the period 2016, based around Brexit, an event which had an influence on
the stock market as a whole, and construct another set of portfolios one-year prior to the
event, to act as a control for comparability and to test validity of the momentum strategy
being used to generate excess returns. From the empirical data, it is seen that in the Brexit
portfolios, every portfolio beat the market, however for the pre-Brexit portfolio, a few
portfolios underperformed the market, with the majority beating the market. Although the
two time periods tested had dissimilar results, this paper can still confirm that the use of the
momentum strategy can be used to predict future returns, and manage to earn abnormal
returns.
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Table of Contents
DECLARATION OF ORIGINALITY 1
ACKNOWLEDGEMENTS 2
ABSTRACT 3
CHAPTER 1: INTRODUCTION 6
1.1 Background to the study 6
1.2 Rationale 7
1.3 Research objectives 7
1.4 Importance of the study 8
1.5 Structure of the dissertation 8
CHAPTER 2: LITERATURE REVIEW 10
2.1 An introduction to the Efficient Market Hypothesis (EMH) 10
2.2 Testing the efficient market hypothesis 12

2.2.1 Testing the weak-form efficiency 12
2.2.1.1 The Filter approach 12
2.2.1.2 The Dow Theory 13
2.2.2 Testing the semi-strong form efficiency 14
2.2.2.1 Event Studies 14
2.2.2.2 Stock Splits 16
2.2.3 Testing the strong-form efficiency 17
2.3 Anomalies 18
2.3.1 The calendar effect 19
2.3.1.1 The January effect 19
2.4 Behavioural Biases 20

2.4.1 Under-reactions, over-reactions and contrarian strategy 20
2.4.2 Momentum trading 21
CHAPTER 3: METHODOLOGY 24
3.1 Introduction 24
3.2 Data 24
3.3 Time period to test 25

3.3.1 The United Kingdoms withdrawal from the European Union (Brexit) 25
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3.3.2 One year prior to United Kingdoms withdrawal from the European Union (pre-Brexit) 25
3.4 Formation Period and Holding Period returns 25
3.5 The Zero-Cost Trading Strategy 27
3.6 Validity test 28
3.7 Strategies characteristics 28
3.8 Hypothesis Test 28

3.8.1 Null Hypothesis (H0) 28
3.8.2 Alternative Hypothesis (H1) 29
CHAPTER 4: RESULTS & ANALYSIS 30
4.1 Findings 30
4.1.1 Results for 3-months formation period 33
4.2 Testing the validity of the research results 37
4.4 The January Effect 38
4.5 Effect of the EU Referendum on the test results 39
4.6 Summary of research results 40
CHAPTER 5: CONCLUSION 41
5.1 Summary 41
5.3 Limitations of the study and suggestions for further research 42
NOTES 43
BIBLIOGRAPHY 44
APPENDIX 48
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Chapter 1: Introduction
This dissertation examines whether a momentum trading strategy can be implemented to beat
the UK stock market, using two time periods, one which is based around an event which has
had a significant effect on the UK stock market, and the other which is one year prior to this
event. This chapter presents the background and rationale to the research and provides an
overview of the research objectives and the structure of the remaining chapters in this
dissertation.
1.1 Background to the study

The motive behind why an individual would initially invest in the capital markets is to
generate a profitable return. There are many techniques and strategies which investors apply,
choosing their own appropriate time horizons, with some investors focussing on short-term
gains, whereas some are interested in long-term profitability. Recent literature in the last two
decades on stock market efficiency reveal anomalies in the capital markets, allowing the
possibility of generating abnormal returns, which is of course a contradiction of the well-
established Efficient Market Hypothesis (EMH).
In existing research, many scholars have found evidence of implementing trading strategies
and rules, with research based around examining historical stock market data. Many
academics have studied the momentum effect, which involves holding long positions in past
winners (best performing stocks) and holding short positions in past losers (worst performing
stocks), which have been shown to earn significant returns in the 3 to 12 month horizon.
Early research by Jegadeesh & Titman (1993) and many later studies in this area has
constantly been challenging the whole concept of market efficiency, suggesting that markets
may not be as efficient, with many papers supporting behavioural finance theory, that many
market inefficiencies exist and follow certain patterns that can be subjugated.
The focus of this dissertation is to test for this momentum effect in the UK stock market, a
market which is perceived to be developed, thus a market which is efficient, as most research
in the field of finance and investment has focused on developed markets, such as the NYSE
and NASDAQ, hence only being appropriate to test this strategy in a similar capital market.
This paper will therefore investigate the presence and profitability of momentum, and
whether this strategy can be applied to beat the UK stock market.
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1.2 Rationale
This study is inspired by the desire to gain a greater understanding of the financial markets,
through implementing momentum trading strategies and examining anomalies to exploit any
market inefficiencies. The research is motivated by a strong personal interest in the general
topic areas and perceived gaps in existing literature. Moreover, financial market efficiency is
the central importance to practitioners, investors, corporations and regulators, with financial
theory being based around the belief that financial agents and markets are rational.
Furthermore, investors depend greatly on strategies which observe stock market behaviour, a
key focus of this research. Also, with the continuous success of individuals such as George
Soros and Warren Buffett, they represent the most immutable contradiction of market
efficiency theories, that returns are unpredictable.
To further add to the rationale of this study, the research has also been driven by Dickinson &
Muragu (1994) mentioning that an efficient market does not have to be perfect, with Ross,
Westerfield and Jordan (2010) concluding that all perfect markets are efficient, but it is not
necessary for efficient markets to be perfect.
1.3 Research objectives

The aim of this dissertation is to explore the current literature on EMH and behavioural
finance, providing a discussion on relevant areas of the topic. Also, this study will
independently perform research to test whether a momentum strategy, which uses historical
stock price data can be executed to earn abnormal returns and beat the UK stock market. The
research objectives was motivated by the findings of Jegadeesh & Titman (1993), who create
16 portfolios testing momentum in the market. The research will mostly adopt a strategy
similar to the one presented in their research paper. The findings will be compared against the
results of a different test period, to provide some validity and comparability of the
methodology used. All in all, the objective is to challenge the EMH through analysing past
data to predict future returns.
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1.4 Importance of the study

This study is directed towards providing an understanding of the EMH and its challenges,
discussing anomalies and strategies which contradict this hypothesis. Moreover, in addition
to this topic area, it will also serve as an insightful and appealing paper to a broader audience,
including financial management students and financial professionals. This paper is written to
further contribute to existing literature, providing new and up to date evidence regarding
momentum in stock markets, and the possibility of this trading technique earning a return
greater than the stock market itself.
1.5 Structure of the dissertation

The remaining chapters of this dissertation address a different topic or issue, same as the
general guidelines for research papers that have already been completed in this field of study,
the below outlines the upcoming chapters.
Chapter 2: Literature review
The literature review looks into existing research and aims to prepare and guide the reader for
the following methodology, results and analysis of the research carried out in this paper. This
chapter will review the EMH, followed by market efficiency tests conducted by prior
researchers, explaining the researched anomalies around this topic and narrowing down into
current literature on momentum.
Chapter 3: Methodology
This chapter will outline the methodological approach that is applied for this study. This
chapter gives detailed explanation of the methods used, taking ideas from existing research in
the topic area. The methodology will also enable future replications of the study.
Chapter 4: Results and analysis
The results are displayed, explained and discussed in this chapter, explicitly referring back to
the research questions and hypothesis. This chapter will also further provide statistical tests to
give some validity to the findings, and any anomalies which have been discussed in chapter 2
will also be examined.
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Chapter 5: Conclusion
This chapter will summarise and derive conclusions from the study conducted, while
referring back to previous studies in the topic area, as well as providing limitations of the
study, whilst also recommending suggestions for future research.
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Chapter 2: Literature review

This chapter will discuss the EMH theory, a philosophy which assumes that the stock markets
are efficient, where all information is reflected instantaneously, which inevitably means that
investors are unable to earn abnormal profits. Many tests have also been conducted on the
three forms of market efficiency, as described in this chapter. But many scholars believe there
are anomalies in the markets, hence the markets may not be as efficient as many academics
perceive it to be. The below literature will also outline the studies of Behavioural Finance,
which argues that investors are irrational and their decisions are effected by a number of
factors, such as under-reactions and over-reactions. Moreover, this literature will further
focus on the concept of momentum.
2.1 An introduction to the Efficient Market Hypothesis (EMH)

The EMH is where markets with significant informational asymmetries, equilibrium prices
aggregate information effectively (Laffont & Maskin, 1990). In its simplest form, the EMH
fundamentally says that it is impossible to beat the stock market due to market efficiency,
as security prices reflect all the available information unbiased and efficiently. Jensen (1978)1
mentions, a market is efficient with respect to information set t if it is impossible to make
economic profits by trading on the basis of information set t. Malkiel (1992)2 also provides a
closely related definition, stating this efficiency as a capital market which fully and correctly
reflects all relevant information in determining a stocks price, implying that it is impossible
to make economic profits by trading on the basis of . Therefore, if an investor was able to
forecast future stock prices, many investors would be generating unlimited profits
(Timmermann & Granger, 2004). The objective of this study is to inevitably defy this
assumption and try to forecast future stock prices to generate abnormal returns.
Referring to the EMH developed in Eugene Famas study in 1970 and 1991, Fama (1970 &
1991) classifies EMH into three forms of capital market efficiency based on the type of
information reflected in a stocks price:
1. Weak-Form Efficiency: In its least rigorous form, this level of efficiency is where the
price in a market fully reflects all information contained in historical prices, including
historical sequence of prices, rates of return, trading volume data and any other
market generated information. Therefore, the weak-form efficiency suggests no
investor can develop a trading strategy based on historical price patterns to generate
abnormal returns. Thus, if this assumption is valid, technical analysis used to predict
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future stock prices would be an ineffective strategy as the price assumes the
characteristics of a random walk.
2. Semi-Strong Form Efficiency: In its slightly less rigorous form, the EMH says a
market is efficient if a stocks price instantaneously reflects any publically available
information. Such information includes profit & loss accounts, balance sheets and
company announcements. Therefore, if the semi-strong form efficiency is valid, no
investor is able to make abnormal returns from good news, as this would be reflected
in the price immediately. Hence, being unable to generate abnormal returns through
fundamental analysis, as the market will quickly digest the publication of new
information by moving the price to a new equilibrium level that reflects the change in
supply and demand.
3. Strong-Form Efficiency: In its strongest form, the EMH states a market is efficient if a
stocks price fully reflects all information, both public and private. This suggests, no
investor would be able to generate abnormal returns, as the market quickly and
accurately reflects all information relevant to the value of a share. Even if a small
group of people have insider information, they still cannot make profits exceeding the
average market return. However, this efficiency suffers, as it is difficult to obtain
empirical evidence, as it is unlikely to win the cooperation of the relevant section of
the financial community (insider dealers).
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2.2 Testing the efficient market hypothesis

There has been a number of studies concerning the issue of market efficiency since the 1960s,
most of these studies have confirmed that the EMH is valid, thus the stock market can be said
to be efficient. However, the definition of market efficiency is based around all information
being fully reflected in a stocks price, and this is so general that it is difficult to test.
Fama (1970) also mentions that in essence you must define what the term fully reflect
exactly means, thus the EMH is split into different forms (mentioned earlier) due to the fact
that it is difficult to find evidence for insiders. Weak-form and semi-strong form is usually
tested empirically, but testing the strong form is difficult.
In essence, the aim of the tests is to check whether share prices respond quickly to new
information, the changes in the predictions of returns should be associated with the change of
their investment risk and whether making excessive returns through trading rules is
unachievable.
2.2.1 Testing the weak-form efficiency

Having acknowledged that the weak-form of the EMH relies on historical information, there
are several methods which exist to test this form of market efficiency, such as the Filter
approach and the Dow Theory.
2.2.1.1 The Filter approach
This approach is part of the serial correlation tests, aimed at focusing the trader on long-term
trends whilst filtering out short-term movements (Arnold, 2002). This rule involves
purchasing a stock when its price increase is at least x%, then holding it until the fall of the
stock price is at least x% in comparison with the previous high price, then selling the stock
until the price has risen to at least x% in comparison with the previous low price. Alexander
(1961) found that there is no filter rule which can systematically return abnormal profits.
These results were later confirmed in research conducted by Fama & Blume (1966) who also
found that you could not make abnormal returns using a filter rule.
Furthermore, except for the filter rule, the autocorrelation function (ACF) and partial
autocorrelation function (PACF) is also used to find the inefficiency amongst a stocks price
in the presence of a serial correlation.
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Assuming a time series {Xt}, the ACF of a time between t and s is defined as:
And the PACF is defined as:
Where P(W | Z) is the best linear projection of W on Z. for instance P(W | Z) =

with zz = Var(Z) as the covariance matrix of the regressors and wz = Cov(W,Z) as the
matrix of covariances between W and Z (Vidali, 2013).
2.2.1.2 The Dow Theory
The Dow Theory was first suggested in the late 1800s and developed by Charles Dow
himself. This theory distinguishes a stock price movement by three basic trend types as,
primary trends3, secondary movements4 and tertiary moves5. Cowles (1933) conducted a
study where one portfolio devised a simple buy-and-hold strategy and the other using the
Dow Theory strategy. The results found that the buy-and-hold strategy performed better than
the Dow strategy by 3.5%.
Further research done by Kendall (1953) concluded that a stock price behaves where each
outcome is statistically independent of past history, similar to a roulette wheel. Roberts
(1959) built up on this conclusion, using a chance model to produce a movement series
which was compared to the Dow Jones Industrial Average movement. His findings showed
an unmistakable resemblance between the chance model (randomly generated pattern) and
the Dow Jones index, concluding that the price changes of the index were as random as the
ones generated by his model, therefore the stock price being unpredictable. Figure 1
illustrates the simulated stock price movements during a fifty-two week period and figure 2
illustrates the real levels of the Dow Jones industrial index, also during the same fifty-two
week period.
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Figure 1- Movements using chance model Figure 2 Dow Jones Industrial Index
2.2.2 Testing the semi-strong form efficiency

As mentioned previously, the semi-strong form of the EMH focuses on the stock price
instantaneously reflecting any publically available information. Hagin (1979) mentions, if a
market is truly efficient, the value of new information that an investor has is destroyed due to
the competitive forces of the market, and several empirical tests have been formulated to test
this form of EMH.
2.2.2.1 Event Studies
Studies of the semi-strong form can be regarded as testing the speed of adjustment of prices
to new information, event studies have been the principle research tool in this area. Dimson
& Mussavian (1998) states an event study as the averages of the cumulative performance of
shares over time, from a number of time periods before an event up until a number of time
periods after.
Undertaking an event study, the excess return can be calculated by subtracting the market
return from the stocks actual return. The market return can be a portfolio index or an
expected return calculated from an asset pricing model, such as CAPM.
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i.e.:
Or either:
Furthermore, the average excess return across all firms on day t can be shown as:
Through calculating the excess stock return for the days leading up to and following any
events, the speed of adjustment of stock returns can be displayed. Fama, Fisher, Jenson &
Roll (1969) are known to be the first to undertake such a study using this analysis.
Moreover, MacKinlay (1997) used the event study to investigate an earnings announcement.
The results of his study show that good news firms showed higher cumulative returns,
especially on day 0 (the event day). His results are show in figure 3.
Figure 3 Plot of cumulative abnormal return for earning announcements from event day -20
to event day 20. The abnormal return is calculated using the constant mean return model as
the normal return.
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2.2.2.2 Stock Splits
Building up on event studies, a stock split is where the number of shares in a listed company
increases, and the price is adjusted so that the market capitalisation of a firm remains the
same after the split. In its crudest form, stock splits do not have any economic value, neither
does it create addition shareholder wealth.
Fama, Fisher, Jenson & Roll (1969) examined the effect of stock split events on a share price
through using data from the NYSE from 1929 until 1959. Their results show that 80% of the
time, a stock split was followed by an announcement for dividend increase. But, unlike a
stock split, a dividend increase adds value to shareholders, thus investors can use stock splits
as an indicator for the possibility of a dividend increase. If the semi-strong form is valid, then
information should be reflected in a stocks price instantly from the moment when the stock
split is announced. Fama, Fisher, Jenson & Roll (1969) displayed their results in three
different categories all splits, splits with dividend increases and splits with no dividend.
These results are shown in figure 4-6.
Figure 4 All splits Figure 5 Dividend increases
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Figure 6 No dividends
From the observed pattern in this study, it is consistent with the EMH, as the share price had
already reflected the information which became publically available, thus this study supports
the semi-strong form, where there is no opportunity for an investor to earn abnormal profits
after a stock split announcement. However, it has been argued that splits increase the
proportional trading costs of stock and investors should require higher returns to make up for
these higher trading costs.
2.2.3 Testing the strong-form efficiency

As discussed previously, the strong-form efficiency is based on the thesis that a stocks price
fully reflects all information, both public and private. There have been a numerous amount of
cases in which investors are alleged of insider trading, where they have made abnormal
profits. However, insider trading is highly governed by the law and is considered illegal, but
the use of inside information is a strong contradiction to strong-form efficiency.
The main focus of the strong-form efficiency are on mutual funds, managers and investment
specialists, people who could possibly have information that is not yet available to the public.
Tests such as mutual fund performance compares the return of various mutual funds with the
returns of randomly constructed portfolios. Studies such as Malkiel (1995) and Elton, Gruber,
Das & Hlavka (1993) evaluate mutual funds, due to the belief that mutual funds hold
information which is not yet publically available, due to heavy investment. They find that
mutual funds on average fail to beat the market. Thus no single fund could possibly achieve
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abnormal returns than what could be expected by random chance, which supports the null
hypothesis that there is no difference between random portfolios and mutual fund schemes.
Nonetheless, some mutual funds have achieved minor abnormal returns. It is important to
note that the EMH does not rule out minor excess returns, thus analysts can still be
encouraged to act on valuable information, nonetheless, investors would still expect no more
than an average net return. This idea is shown by Grossman & Stiglitz (1980), who
formulises that a sensible model of equilibrium must leave some incentive for security
analysis. They also further observe that in a world of costly information, it is impossible for
markets to be informationally efficient6.
2.3 Anomalies
The EMH has been debated greatly, and has received criticism by researchers due to its non-
validity. In the 1980s many scholars believed that you could earn abnormal profits, as it can
be possible to predict the direction of future stock price changes, thus being inconsistent with
the EMH. However, many also argue that the possibility to predict the direction of stock
trends would not violate the EMH, as the equilibrium would be reached either in the short-run
or in the long-run.
Moreover, if there is market inefficiency, it is possible to predict the changes of the stock
prices and make excess return, as it can be said that there are market anomalies in the
financial markets. Such market anomalies are calendar effects, which will be discussed in this
section.
This section will also focus on behavioural finance, which is referred as open-minded
finance by Thaler (1993). It has been argued that with behavioural finance recognising the
standard finance model of profit maximisation and rational behaviour, which can be true
within specific boundaries, it fails to consider individual behaviour, as noted by Olsen (1998).
Behavioural finance focuses on the psychology on market players and their impact on the
capital markets. This makes many scholars consider the chances that the markets might not
be as efficient as said by the EMH, also with increasing evidence contradicting the EMH, this
gives ground to challenge the idea that investors behave rationally.
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2.3.1 The calendar effect

Many empirical studies have observed that the prices increase or decrease during specific
periods of the week or year, thus being referred to as calendar effects. But, according to
standard economic theory, researchers should not be looking for such trends, due to the belief
that prices follow a martingale process and returns should not exhibit systematic patterns
(Samuelson, 1965), (Leroy, 1973) and (Lucas,1978).
Nonetheless, researchers are passionate by the possibility of finding systematic trends.

Furthermore, Merton (1987) highlights that economists place a premium on the discovery of
puzzles, such as finding apparent rejections of widely accepted theories such as the EMH. In
addition, published academic studies on calendar effects date back to the early 1930s, such as
Fields (1931 & 1934).
Current literature refer to various calendar effects, but in this subsection, the most popular
calendar effect will be highlighted, the January effect, an anomaly which will also be
examined in the empirical results of this study.
2.3.1.1 The January effect
Most empirical studies on monthly patterns report the January effect as a major finding, with
reference to earning abnormal profits during this month compared to the rest of the year.
Rozeff & Kinney (1976) and Gultekin & Gultekin (1983) use US stock market data, finding
that the month of January provided higher returns compared to other months. These results
are consistent with other markets, Nassir & Mohammed (1987) reported that January returns
were significantly higher than other months in Malaysia, with Balaban (1995) showing
similar results with Turkey. However, Fountas & Segerdakis (2002) tested for this effect,
using monthly stock returns in eighteen emerging stock markets, finding very little evidence
for the January effect.
A possible explanation for this phenomenon could be factors such as capital taxation, where
investors sell stocks at the end of the year to claim capital losses and offset the tax liability
with the capital gains and then reinvest at the start of the following year. Another explanation
could be firms window dressing, improving the appearance of the portfolio before presenting
to shareholders and clients.
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2.4 Behavioural Biases

The above acknowledges that calendar effects such as the January effect, can cause the
failure of the EMH. However, there are several elements which may affect the behaviour of
investors. As a result, the mechanism of prices does not create unbiased predictions.
2.4.1 Under-reactions, over-reactions and contrarian strategy

Many academics argue that contrarian7 profits are a result of excessive investor optimism and
pessimism, for instance, an over-reaction to information. Studies, such as the one done by
Chopra, Lakonishok & Ritter (1992) reveal that contrarian profits are achievable, even when
size, beta and historical returns are accounted for. Studies also demonstrate that a contrarian
strategy can be profitable even in short horizons. (e.g. Jegadeesh (1990) and Lehman (1990)).
Moreover, further studies also reveal that price reversals also occur in international markets
(e.g. Baytas & Cakici (1999) and Antoniou, Galariotis & Spyrou (2005)).
Although long-term and short-term contrarian profits and over-reaction to information seems
probable, a number of studies empirically provide results for the medium-term (e.g.
Jegadeesh & Titman (1993) and Conrad & Kaul (1998)). Research suggests that stock prices
under-react to publically available information, where this under-reaction creates profitable
momentum profits. For example, earning profits from a strategy where an investor goes long
on a portfolio which consists of shares that have performed well in the past (prior winners)
and going short on a portfolio which consists of shares that have performed poorly in the past
(prior losers).
Literature provides many explanations for these anomalies. Conrad & Kaul (1993) point out
that the reason of these contrarian profits can be due to bid-ask biases and infrequent trading,
while market behaviour following one day stock price declines has been examined by Cox &
Peterson (1994), where they find evidence consistent with the bid-ask bounce and liquidity as
a clarification of price reversals. Chan (1988) argues the fact that excess returns could be due
to the changes in the equilibrium required returns, Ball & Kothari (1989) also argues the
same issue. Furthermore, it has been pointed out by Lo & MacKinlay (1990) that some stocks
react more rapidly than others in the light of new information, hence a contrarian strategy
could still produce profits, even if neither stock over-reacts to information. For example, a
lead-lag relationship between returns is a crucial factor that contributes towards contrarian
profits, although it has been demonstrated by Jegadeesh & Titman (1995) that delayed
reactions cannot be exploited by contrarian strategies.
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Furthermore, many studies also try to explain the predictability of returns within an over-
reaction and/or under-reaction context employing behavioural models. Such as Daniel,
Hirshleifer & Subrahmanyam (1998) mention that investors are overconfident, where self-
attribution bias is present. They discuss that the arrival of information that either confirms or
disconfirms investors private information will result in an asymmetric reaction, therefore
resulting in an over-reaction and return momentum in the short-run following the arrival of
confirming news. Moreover, Hong & Stein (1999) mention that there are two types of
investors. One that relies on their private information, and the other who rely on past price
information (i.e. momentum traders), they develop a model which predicts initial under-
reaction and subsequent over-reaction to information.
2.4.2 Momentum trading

The momentum strategy or effect focuses on stocks that are moving in one direction, where
there is an identifiable pattern. Hong & Stein (1999) mention that investors use this
momentum strategy because a price increase can be a result of good news that is not yet fully
incorporated into a stocks price, a rejection of the semi-strong form of the EMH.
Many scholars imply that a positive autocorrelation at short-time intervals may result in
profitable trading opportunities. Jegadeesh & Titman (1993, 1995) showed significant
positive returns when they traded stocks based on short-run historical returns. They reported
firms with higher returns in the past 3-12 month period outperformed firms with lower
returns in the same time period. Stocks were ranked in ascending order based on their past 3-
12 month returns, and form ten equally weighted deciles8 of stock portfolios. The bottom
decile was classified as the winner decile and the top decile as the loser decile. The strategy
was to buy the winner decile and sell the loser decile with 3, 6, 9 and 12 month holding
periods. From their 1993 study, it was reported that selecting stocks based on the past 12
month performance and holding this position for 3 months was the most successful strategy,
yielding the best results, as shown in figure 6.
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Figure 6 Source: Jegadeesh & Titman

(1993)
Furthermore, with the use of the Fama-French three factor risk-adjusted return model,
Grundy & Martin (2001) reported a more than 1.3% profitability per month using momentum
strategies on the NYSE and AMEX stocks over the period 1966-1995. Like most studies on
momentum, they bought winners and went short on losers, but what differs in their research
was the adjustment for dynamic risk exposure. Grundy & Martin (2001) also conclude that
the momentum profits were remarkably stable across sub-periods of the entire post-1926 era,
whilst further mentioning that the cause of momentum is not due to industry effects nor
cross-sectional differences in expected returns. Moskowitz & Grinblatt (1999) found a strong
momentum effect when buying stocks from past winning industries and selling stocks from
past losing industries, it was still a highly profitable strategy even after controlling for cross-
sectional dispersion in mean returns and microstructure differences. Rouwenhorst (1998)
tested the profitability of momentum strategies using monthly total returns from 12 European
countries during 1980 and 1995. After correcting for risk, they found that the winner
portfolios outdid the loser portfolio by more than 1% per month. And the overall returns on
the momentum portfolios are similar to the findings of Jegadeesh & Titman (1993) study for
the US market.
22
In the case of the UK, Clare & Thomas (1995) and Dissanaike (1997) report some evidence
of momentum. However, the focus of their studies were on long-run over-reaction rather than
short-term momentum effects. Clare & Thomas (1995) used a random sample of stocks from
the London Share Price Database (LSPD) over 1955-1990, and found weak evidence of
momentum at the 12 month horizon, but find significant evidence of over-reaction at the 24
and 36 month horizon. Also using data from the LSPD, Dissanaike (1997) used a larger
sample of stocks that are part of the FT500 Index over 1975 and 1991. They found evidence
of momentum up to the 24 month horizon, thus the results contradict the 24 month horizon
results of Clare & Thomas (1995). A paper by Liu, Norman & Xu (1999) concentrates on
short-term returns, recognising momentum profits being present in UK stock returns over the
period 1977 and 1996. Even after controlling for systematic risk, size, price and book-to-
market ratio, this did not destroy momentum profits. Moreover, they also examine
momentum profits in sub-samples of their dataset, and argue that in the UK equity market,
momentum effects are a robust feature.
In summary, the evidence from the above studies show that over the short-term to medium-
term horizons (3-12 months), momentum strategies are most profitable, while contrarian
strategies are more profitable over the very short-term (1-4 weeks) and long-term (36-60
months) horizon.
Also, studies such as Jegadeesh & Titman (1993) provide evidence which supports the views
of behavioural finance, where they identify certain trading rules (i.e. momentum strategy),
which allow for profits to be achieved based on past information. This rule will later form the
methodology of the research objective.
However, all of the positive returns from the momentum strategy has been contradicted by
Liu & Lees (2001) study. Their research concentrates on the Japanese stock market from
1975 to 1997. Their strategy was based on buying past 3-12 month winners and selling the
losers of the same period. But rather than reporting positive returns, their results gave an
average loss of 0.5% per month over the 3-12 month horizon. Liu & Lee tried to explain the
loss of this strategy through doing further tests. They extended the holding period past 12
months, which was not an effective strategy either. But one of the main causes was due to the
stock market tested itself, unlike other capital markets, the Japanese stock market shows no
evidence of any time series patterns and predictability, and stock prices seem to reverse rather
than continue.
23
Chapter 3: Methodology
3.1 Introduction
Following the literature discussed and the past research findings, this chapter aims to develop
a methodology which builds on the momentum effect within stocks, and further tests whether
or not this trading strategy allows an individual investor to earn profits in excess of the
market return (i.e. is it possible to beat the market?).
The EMH is based on the assumption that it is impossible to beat the market, with developed
stock markets (i.e. UK and USA) considered to be relatively efficient. This means that
developed stock markets would reflect all publically available information instantaneously,
implying that it is impossible to beat the market return using trading rules which involve
using historical information. Tests of the semi-strong form efficiency typically begin at time
t = 0, and portfolios are usually formed around an event, which has an effect on all stocks
that would be included in a portfolio.
If markets are truly efficient, then at time t > 0 the estimated residual portfolio returns should
be zero, but if there is evidence for consistent deviation from zero, this would provide
evidence against market efficiency.
The aim of this chapter is to outline the methodology used to test whether the momentum rule
can be used generate abnormal returns (inevitably beating the stock market), as illustrated by
research discussed in the literature review. The general idea of the methodology will be to
check how the strategy performs between different formation and holding periods. If the
methodology manages to stay consistently profitable throughout the testing period, it can be
applied in the future with greater confidence in its profitability. The next sections will outline
the details of the methodology conducted to fulfil the research objective.
3.2 Data
The empirical tests conducted will use stock market data from the UK stock market (FTSE
All-Share). The rationale behind using the UK market index as a proxy is because the UK is
perceived to be a developed stock market, hence according to the EMH, it would be
impossible to beat this market due to its market efficiency.
The online website www.investing.com will be used to pull out stock market data. This is the
preferred choice because it is easy to access and view, providing graphs which allows the
implementation of trend lines and oscillators (e.g. RSI indicator).
24
3.3 Time period to test
3.3.1 The United Kingdoms withdrawal from the European Union (Brexit)
As mentioned previously, Tests of the semi-strong form efficiency typically begin at time
t = 0, and portfolios are usually formed around an event. Thus, trading will start from the
date of the EU referendum result (24th July 2016). The market was not expecting the result to
be Brexit, this had a dramatic response. Major stock markets around the world saw large falls
and the pound weakened substantially, falling to a level not seen since the mid-1980s. The
result of Brexit means the UK market will be very difficult to predict, as the market is likely
to remain volatile. However what we can predict is that uncertainty regarding Britains future
trading relationship with the EU will contribute to a continued volatility in the interim period.
3.3.2 One year prior to United Kingdoms withdrawal from the European Union (pre-
Brexit)
For a comparison, a stock portfolio will also be formed one year prior to this event, this
would allow comparison, to justify whether a portfolio return is effected in the wake of a
national event such as Brexit. It also allows a side-by-side comparison of results which were
generated from using the same trading strategy or rule.
3.4 Formation Period and Holding Period returns
To calculate the momentum returns, the procedures suggested by DeBondt & Thaler (1985),
Lo & MacKinlay (1990) and Jegadeesh & Titman (1993) will be used. This is described in
the following steps:
1. Referring to the formula below, the cumulative monthly returns (CR) over the J
months prior to the portfolios formation date (i.e. J months before t = 0) will be
calculated. In the formula below, the value of n = J is the number of months in the
formation period, where ri is the stock return in month i. CR is also referred to as the
Formation Period Return (FPR).
25
Below are some examples of the FPR over specific months:
FPR over a three-month formation period: FPR(3)=[(1+ R1)(1+ R2)(1+ R3)] -

1.
FPR over a six-month formation period: FPR(6)=[(1+ R1)(1+ R2)(1+ R6)] -
1.
FPR over a nine-month formation period: FPR(9)=[(1+ R1)(1+ R2)(1+ R9)]
- 1.
FPR over a twelve-month formation period: FPR(12)=[(1+ R1)(1+ R2)(1+
R12)] - 1.
2. After calculating the FPR for each portfolio at the end of each formation period, the
CR would be calculated again, but now for the K months after the formation date (i.e.
t > 0). This would be classified as the testing period, where CR is now referred to as
the holding period return (HPR). Furthermore, the Average Holding Period
Cumulative Returns (AHPCR) of a specific portfolio would be calculated as:
In the above formula, n is the number of months in the testing period, ri,j is the return
on stock j in the month i, and N is the number of stocks in a portfolio. Hence,
AHPCRBrexit would be the CR over the K month testing period of an equally weighted
portfolio of the stocks bought around the Brexit event, while AHPCRPre-Brexit would be
the CR over the K month testing period of an equally weighted portfolio of the stocks
bought the year prior to Brexit happening. But for the purpose of this assignment,
only the HPR would be calculated, which will then be compared to the CR of the UK
stock market to assess whether the formed portfolios managed to beat the market
using momentum trading strategies.
26
3.5 The Zero-Cost Trading Strategy

Moreover, the assumption of a zero-cost trading strategy or arbitrage strategy9 has been used
in many empirical studies which investigate the performance of momentum strategies. This
strategy is to short the past loser portfolio and long the past winner portfolio (e.g. Jegadeesh
& Titman (1993), Chui, Titman & Wei (2000) and Hong, Lee & Swaminathan (2003)). This
methodology will be under the assumption that momentum exists in stock prices and is
persistent, thus this zero-cost trading approach (or arbitrage strategy) is a zero initial cost,
self-financing trading tactic. Furthermore, with cumulative discounted value v (t), the zero-
cost trading strategy fulfils four assumptions (Hogan, Jarrow, Teo & Warachka, 2004):
1. As mentioned already, it is a zero initial cost, self-financing trading strategy.
2. It has positive expected discounted profits in the limit.
3. Furthermore, it has a probability of a loss converging to zero.
4. Plus a time-averaged variance converging to zero if the probability of a loss does not
become zero in finite time.
Conclusively, if a transaction involves only a positive cash flow with no adverse cash flows
at any probabilistic or temporal state, then momentum exists when the short-term arbitrage
momentum trading strategy is used. Also, a positive return on the strategy can only be a result
of their being momentum in the market, which would provide towards empirical evidence for
momentum being present.
27
3.6 Validity test

In order to examine the strength of the research results, further statistical tests will also be
conducted. Calculating the mean, t-value, p-value, and standard deviation of the results.
These will be further explained and illustrated in the following chapter.
3.7 Strategies characteristics

To ensure the results from this methodology is due to the fundamental logic of the trading
strategies employed, several tests will be deployed. 12 portfolios will be formed with
formation period J = [3, 6, 9 and 12 months], with holding period K = [3, 6 and 8 months].
Jegadeesh & Titman (1993) mention this as a J month / K month strategy. Unfortunately 16
portfolios cannot be formed (as seen in Jegadeesh & Titman (1993)) due to this being an ex-
ante test, and considering the time scale of this dissertation. Nevertheless, ex-ante testing is
not normally seen in momentum research, therefore differentiating this study from other
scholars.
Also, to add strength to this study, and be able to provide further evidence, a further 16
portfolios will be formed, an ex-post-test (common in most research studies), which will be
investigating one year prior to Brexit. The portfolios will consist of formation periods J = [3,
6, 9 and 12 months], with holding period K = [3, 6, 9 and 12 months].
3.8 Hypothesis Test

A null hypothesis and alternative hypothesis has been constructed, in order to answer the
question of whether a momentum rule can be used to beat the UK stock market.
3.8.1 Null Hypothesis (H0)

The null hypothesis (H0) will state that the momentum effect does not exist, and this
momentum rule cannot be used to beat the UK stock market. Hence, if the difference between
the constructed portfolio returns and the UK stock market returns is equal to zero or negative,
then this provides evidence that the momentum effect cannot be used to earn abnormal
returns. Therefore:
H0: Constructed Portfolio Return UK Stock Market Return 0.
28
3.8.2 Alternative Hypothesis (H1)

The alternative hypothesis (H1) is the opposing to H0, where H1 states that the momentum
effect does exist, and this momentum rule can be used to beat the UK stock market. So, if the
difference between the constructed portfolio returns and the UK stock market returns is
greater than zero, this provides evidence that the momentum effect can be successfully used
to earn abnormal profits, defying the EMH theory. Therefore:
H1: Constructed Portfolio Return UK Stock Market Return > 0.
29
Chapter 4: Results & Analysis
This chapter will focus on the findings of the tests carried out, through having two opposing
hypothesis (mentioned in the methodology) which will help answer the research objective of
whether a momentum strategy can be used to beat the market. This chapter will examine the
results of the research and further analyse and interpret the outcomes of this study.
Detailed research results will be included in the appendices at the end of this dissertation.
4.1 Findings
K-month
Event: Brexit Event: Pre-Brexit
J-month
3-Month 6-Month 8-Month 3-Month 6-Month 9-Month 12-Month
HPR(3) HPR(6) HPR(8) HPR(3) HPR(6) HPR(9) HPR(12)
x 0.1526 0.2105 0.2892 (0.0668) 0.0308 0.0007 (0.1317)
3-Month y 0.0663 0.0969 0.1190 (0.0708) (0.0425) (0.0574) (0.0246)
Variance (x-y) 0.0863 0.1136 0.1702 0.0040 0.0733 0.0581 (0.1071)
x 0.1135 0.1216 0.1258 (0.0158) (0.3806) (0.4128) (0.4030)
6-Month y 0.0663 0.0969 0.1190 (0.0708) (0.0425) (0.0574) (0.0246)
Variance (x-y) 0.0472 0.0247 0.0068 0.0550 (0.3381) (0.3554) (0.3784)
x 0.1177 0.1485 0.2087 0.0015 0.0428 0.0581 0.0157
9-Month y 0.0663 0.0969 0.1190 (0.0708) (0.0425) (0.0574) (0.0246)
Variance (x-y) 0.0514 0.0516 0.0897 0.0723 0.0853 0.1155 0.0403
x 0.1123 0.1266 0.1755 0.0457 0.1313 0.0872 (0.0855)
12-Month y 0.0663 0.0969 0.1190 (0.0708) (0.0425) (0.0574) (0.0246)
Variance
Figure 7 Overall (x-y) of the
Results 0.0460 0.0297
momentum 0.0565
strategy in 0.1165
the UK stock 0.1738
market. 12 portfolios 0.1446 (0.0609)
of stocks bought
around the Brexit event, and 16 portfolios formed one year prior to Brexit.
Figure 7 illustrates the overall results of this study. The below outlines the key information in
this table:
J-month: The number of months in the formation period.

K-month: The number of months in the testing/holding period.
Event: Brexit: Results of the portfolios formed when T = 0 = 24/06/2016 (Brexit
announced).
Event: Pre-Brexit: Results of the portfolios formed when T = 0 = 24/06/2015 (one
year prior to the Brexit announcement)
x: The HPR of the constructed portfolio.
y: The HPR of the UK stock market.
30
Variance (x-y): Simply the difference between the two returns, a positive figure
implies making abnormal profits and vice-versa.
The evidence suggests that all 12 portfolios that used the momentum effect during the Brexit
event all generated abnormal returns, favouring H1, beating the market from 0.68% to
17.02%. The results for the portfolios created for pre-Brexit show that 5 portfolios yielded
negative returns over the periods 3 months / 12 months, 6 months / 6 months, 6 months / 9
months, 6 months / 12 months and 12 months / 12 months. These portfolios underperformed
the market from negative 6.09% and negative 37.84%. These results may favour H0, but 11
portfolios go in favour of H1, outperforming the UK stock market from 0.4% to 17.38%.
These results formed around the two time periods support the alternative hypothesis, which
indicates that the momentum rule can be used to beat the market, as illustrated below:
Strategies: Formation / Holding H0 H1
Brexit
3 months / 3, 6 and 8 months No strategies 3 strategies: 3, 6 and 8 months
Pre-Brexit
3 months / 3, 6, 9 and 12 months 1 strategy: 12 months 3 strategies: 3, 6 and 9 months
6 months / 3, 6, 9 and 12 months 3 strategies: 6, 9 and 12 months 1 strategy: 3 months
9 months / 3, 6, 9 and 12 months No strategies 4 strategies: 3, 6, 9 and 12 months
12 months / 3, 6, 9 and 12 months 1 strategy: 12 months 3 strategies: 3, 6, and 9 months
31
Figure 8 plots the empirical results of the constructed portfolios and UK stock market
portfolios for the two time periods tested. The following subsections will briefly describe
each formation period.
Figure 8 Constructed portfolios UK stock market portfolios based on 3, 6, 9 and 12

month formations and holding for 3, 6, 8, 9 and 12 months.
32
4.1.1 Results for 3-months formation period

Portfolios: Brexit Portfolios: Pre-Brexit
Months after
The zero-cost The zero-cost
formation x y x y
portfolio portfolio
1 0.0728 0.0379 0.0349 0.0238 0.0225 0.0013
2 0.0402 0.0117 0.0285 (0.0543) (0.0635) 0.0092
3 0.0329 0.0155 0.0174 (0.0362) (0.0296) (0.0066)
4 0.0165 0.0034 0.0131 0.0065 0.0427 (0.0362)
5 0.0219 (0.0205) 0.0424 0.0449 0.0022 0.0427
6 0.0110 0.0467 (0.0357) 0.0502 (0.0139) 0.0641
7 0.0497 (0.0039) 0.0536 (0.0910) (0.0325) (0.0585)
8 0.0146 0.0241 (0.0095) 0.0240 0.0030 0.0210
9 - - - 0.0431 0.0145 0.0286
10 - - - (0.0299) 0.0077 (0.0376)
11 - - - 0.0218 0.0024 0.0194
12 - - - (0.1246) 0.0244 (0.1490)
Figure 9 Return performance for 3 months formation period.
Figure 10 Plot for momentum strategy for 3 month formation

period
From the above figures 9 and 10, which shows the results of the performance of this study on
a 3-month formation period. It can be graphically seen that this portfolio was not efficient in
producing persistent returns, with the pre-Brexit portfolio being inconsistent, and the
Brexit portfolio having a trend from 1-4 month holding periods, and then becoming
inconsistent until month 8.
33

Months after
formation x y x y
portfolio portfolio
1 0.0668 0.0379 0.0289 0.0261 0.0225 0.0036
2 (0.0074) 0.0117 (0.0191) (0.0214) (0.0635) 0.0421
3 0.0517 0.0155 0.0362 (0.0198) (0.0296) 0.0098
4 0.0007 0.0034 (0.0027) (0.5225) 0.0427 (0.5652)
5 (0.0449) (0.0205) (0.0244) 0.0382 0.0022 0.0360
6 0.0539 0.0467 0.0072 (0.0460) (0.0139) (0.0321)
7 (0.0044) (0.0039) (0.0005) (0.0068) (0.0325) 0.0257
8 0.0082 0.0241 (0.0159) 0.0028 0.0030 (0.0002)
9 - - - (0.0481) 0.0145 (0.0626)
10 - - - (0.0197) 0.0077 (0.0274)
11 - - - 0.0240 0.0024 0.0216
12 - - - 0.0129 0.0244 (0.0115)
Figure 12 Plot for momentum strategy for 6 month formation

period
The portfolio which was formed with a 6 month formation period for pre-Brexit was quite
consistent with the returns of the UK stock market at the same time period, however during
month 4, it can be clearly examined that the constructed portfolio underperformed drastically
in comparison to the other months. However, the portfolio for Brexit can be seen to be more
random month on month, with no consistent returns in comparison to the market.
34

Months after
formation x y x y
portfolio portfolio
1 0.1138 0.0379 0.0759 0.0202 0.0225 (0.0023)
2 (0.0144) 0.0117 (0.0261) (0.0278) (0.0635) 0.0357
3 0.0181 0.0155 0.0026 0.0098 (0.0296) 0.0394
4 0.0236 0.0034 0.0202 0.0403 0.0427 (0.0024)
5 (0.0350) (0.0205) (0.0145) (0.0065) 0.0022 (0.0087)
6 0.0404 0.0467 (0.0063) 0.0074 (0.0139) 0.0213
7 0.0080 (0.0039) 0.0119 (0.0400) (0.0325) (0.0075)
8 0.0440 0.0241 0.0199 0.0326 0.0030 0.0296
9 - - - 0.0235 0.0145 0.0090
10 - - - (0.0277) 0.0077 (0.0354)
11 - - - 0.0325 0.0024 0.0301
12 - - - (0.0446) 0.0244 (0.0690)
Figure 14 Plot for momentum strategy for 9 month formation period
With a 9 month formation period, the Pre-Brexit portfolios performed quite well,
outperforming the market most the months, with a few months being consistent with the UK
stock market, however, from month 10, there seems to be drastic underperformance
compared to the market. In the Brexit portfolios, the first month saw the portfolio outperform
the market, and then returns became consistent thereafter, with no major spikes.
35

Months after
formation x y x y
portfolio portfolio
1 0.0616 0.0379 0.0237 0.0649 0.0225 0.0424
2 0.0235 0.0117 0.0118 (0.0404) (0.0635) 0.0231
3 0.0237 0.0155 0.0082 0.0233 (0.0296) 0.0529
4 (0.0138) 0.0034 (0.0172) 0.0291 0.0427 (0.0136)
5 (0.0198) (0.0205) 0.0007 (0.0184) 0.0022 (0.0206)
6 0.0477 0.0467 0.0010 0.0711 (0.0139) 0.0850
7 0.0129 (0.0039) 0.0168 (0.0674) (0.0325) (0.0349)
8 0.0302 0.0241 0.0061 (0.0017) 0.0030 (0.0047)
9 - - - 0.0323 0.0145 0.0178
10 - - - (0.0607) 0.0077 (0.0684)
11 - - - 0.0197 0.0024 0.0173
12 - - - (0.1218) 0.0244 (0.1462)
Figure 16 Plot for momentum strategy for 12 month formation period
Analysing the historical performance over the course of 12 months, the pre-Brexit portfolio
performed well for 6 months after the formation period, but then the portfolio started to
underperform the market thereafter, getting worse in months 7, 10 and 12 respectively. But
the 12 month formation period seemed to serve the Brexit portfolio well, outperforming the
market in months 1-3 until underperforming in month 4, whilst being consistent with the UK
stock market in months 5 and 6, until it started making abnormal profits again in months 7
and 8.
36
4.2 Testing the validity of the research results
Brexit
Holding Period df mean t-value p-value Std. Deviation
3-month 3 0.05773 6.01610 0.00920 0.01919
6-month 3 0.05490 2.68856 0.07451 0.04084
8-month 3 0.08080 0.09994 0.09994 0.06865
Pre-Brexit
Holding Period df mean t-value p-value Std. Deviation
3-month 3 0.06195 2.66399 0.07608 0.04651
6-month 3 (0.00143) 0.01245 0.99085 0.22888
9-month 3 (0.00930) 0.94153 0.94153 0.23352
12-month 3 (0.12653) 1.41492 0.25203 0.17884
Figure 17 Results for the statistical test applied for testing the results.
Note: df = degree of freedom.
As mentioned in the methodology, to further evaluate and interpret the hypothesis findings,
two basic statistical tests were performed. The first one was the t-statistic (t-value), where this
test usually finds evidence of a significant difference between population means. H0 will be
rejected if the value of the t-statistic is sufficiently large, thus supporting H1. The second test
computed the p-value, which is the probability of attaining a result equal to or more extreme
than what was actually observed. Using a 5% significance level, if the p-value is > 0.05, this
provides evidence to support H0, and if the p-value is < 0.05, then this favours H1.
Referring to the results shown in figure 17, the Brexit portfolios 3 month holding period
shows evidence of momentum, with a t-value of 6.01610 and a p-value of < 0.05, hence
supporting H1. However, this momentum does not seem to stay consistent, as in the 8-month
holding period, a t-value of 0.09994 and a p-value of > 0.05 supports H0, providing no
evidence of a momentum effect during these later months.
On the other hand, with the pre-Brexit portfolios, it can be argued that during the 3-month
holding period, there may be signs of some momentum. However, during later months, from
6-months onwards, the figures all support the null hypothesis, providing evidence that no
momentum effect is present in these months.
Moreover, other than calculating the t-value and p-value, the mean and standard deviation
were also calculated to measure the reliability of the obtained results in the study, measuring
the volatility around the mean. Therefore, for the Brexit portfolios, it can be seen that there is
not much volatility around the mean of the abnormal returns. However, for the pre-Brexit
37
portfolios, there is not much volatility in the 3-month holding period, but for the later months,
the results shows no significance, as there is high volatility around the mean for the holding
periods.
4.4 The January Effect
Post-formation January returns

3-month formation 6-month formation 9-month formation 12-month formation
Month Pre-Brexit Return Brexit Return Pre-Brexit Return Brexit Return Pre-Brexit Return Brexit Return Pre-Brexit Return Brexit Return
July 0.0013 0.0349 0.0036 0.0289 (0.0023) 0.0759 0.0424 0.0237
August 0.0092 0.0285 0.0421 (0.0191) 0.0357 (0.0261) 0.0231 0.0118
September (0.0066) 0.0174 0.0098 0.0362 0.0394 0.0026 0.0529 0.0082
October (0.0362) 0.0131 (0.5652) (0.0027) (0.0024) 0.0202 (0.0136) (0.0172)
November 0.0427 0.0424 0.0360 (0.0244) (0.0087) (0.0145) (0.0206) 0.0007
December 0.0641 (0.0357) (0.0321) 0.0072 0.0213 (0.0063) 0.0850 0.0010
January (0.0585) 0.0536 0.0257 (0.0005) (0.0075) 0.0119 (0.0349) 0.0168
February 0.0210 (0.0095) (0.0002) (0.0159) 0.0296 0.0199 (0.0047) 0.0061
March 0.0286 - (0.0626) - 0.0090 - 0.0178 -
April (0.0376) - (0.0274) - (0.0354) - (0.0684) -
May 0.0194 - 0.0216 - 0.0301 - 0.0173 -
June (0.1490) - (0.0115) - (0.0690) - (0.1462) -
Average monthly returns
Month Pre-Brexit Return Brexit Return
July 0.0112 0.0409
August 0.0275 (0.0012)
September 0.0239 0.0161
October (0.1544) 0.0034
November 0.0123 0.0011
December 0.0346 (0.0085)
January (0.0188) 0.0205
February 0.0114 0.0002
March (0.0018) -
April (0.0422) -
May 0.0221 -
June (0.0939) -
Figure 18 Post-formation January returns.
In the literature reviewed, anomalies such as the January effect has been discussed. DeBondt
& Thaler (1985) provide evidence for the existence of the January anomaly in stock returns,
they document stocks earning large extraordinary positive excess returns during January.
Figure 18 illustrates the monthly returns of the post-formation months, and from the graph,
which plots the average monthly returns, it can be seen that for the pre-Brexit portfolios,
abnormal returns are the highest during December, which provides evidence towards a
January effect in the UK stock market, as during the year end, it can be argued that investors
are more active. However, this spike seems to come down as it comes to January, but then
rises again in February. Moreover, with the Brexit portfolios, a clear January effect can be
seen, with the month of January having a high return compared to previous months. Also it is
expected that the Brexit portfolios would be more volatile, but the pre-Brexit portfolio shows
higher volatility in the returns achieved, but this could be down to many factors, such as the
types of stocks which were chosen.
38
From the findings above, our observations show a significant January effect, with it being
more obvious in the Brexit portfolios. However, it should be noted that even though there are
signs of a January effect, the returns are not substantial enough to account for the overall
performance of both portfolios, especially not serve as an explanation for the overreaction of
the Brexit portfolios.
4.5 Effect of the EU Referendum on the test results

Close Price Close Price Return
Region Description 23/06/2016 30/06/2017 (1 week)
United Kingdom FTSE 100 6338.10 6504.33 2.56%
Emerging Markets MSCI Emerging Markets Index 835.43 834.10 -0.16%
United States S&P 500 2113.32 2098.86 -0.69%
Global Stocks MSCI World 1691.76 1634.40 -3.51%
Developed Markets FTSE Developed Index 264.26 258.18 -2.35%
Developed Europe Stoxx Europe 600 346.64 329.88 -5.08%
Figure 19 Regional Analysis
The EU Referendum result on 24th June 2016, announcing the unexpected result of Brexit,
had a negative effect on many stocks. Investors withdrew out of the market, which
plummeted the price of stocks, with the pound sterling falling to a 31-year low. However, all
Brexit stocks beat the market, with the use of a momentum strategy. Initially, due to Brexit, it
was thought that it would be very difficult to beat the market, due the volatility of the stock
market, but in all portfolios, the returns were significantly higher than the UK stock market.
Furthermore, when different regions are examined (figure 19), the United Kingdom
(represented by the FTSE 100 index) is up, with a return of 2.56% in just a week. It is also
the best performing region examined, with all other regions suffering small losses, with
developed Europe nursing a 5.08% loss. It appears that Brexit may have just caused a short-
term shock to the capital markets, and its effect has just accelerated existing trends. This
could be due to many factors, such as investors possibly being unhappy with the yields in the
bond markets, and staying invested in stocks with a focus on more defensive sectors. Or
perhaps investors might be thinking that the effects of Brexit, though unclear, are such a long
way off that it should have an insignificant effect on stock prices.
39
4.6 Summary of research results

The research and findings of Jegadeesh & Titman (1993) motivated the research conducted in
this dissertation, who use a momentum strategy to test stock returns over the short-medium
term horizon (3 12 month holding periods).
The empirical results presented in this paper finds evidence for using the momentum strategy
to successfully beat the UK stock market. Tests of market efficiency are usually formed
around an event, which has had a significant effect on all stocks that would be included in a
portfolio. Thus the most significant event which recently happened was the EU Referendum
result announcing Brexit during the summer of 2016. This period was tested, to justify
whether the EMH can be exposed, challenging the theories most basic principle of using past
stock price movements to predict future price movements. Using a formation/holding period
approach, 12 portfolios were constructed, where all portfolios beat the market, generating
abnormal profits between 0.68% and 17.02%. The findings were further supported by t-value
and p-value, which illustrates whether or not the results are economically significant.
Moreover, the standard deviation was also calculated to assess the riskiness and volatility of
the returns around the mean. The results of the Brexit portfolios contradict the suggestions of
Ball & Kothari (1989) that abnormal returns may be due to the relative risks, but our results
show little volatility around the mean. In addition, to add structure and comparability to the
research objective, the same strategy was deployed, testing the market one year prior to
Brexit, creating 16 portfolios. Even though most the portfolios beat the market, which
supports the hypothesis that previous stock momentum can be used to predict future trends to
earn abnormal returns, but doing further statistical tests, it was shown that only for the 3-
month holding period, a momentum was shown, with positive mean returns, with later
months displaying negative mean returns with high volatility. Also, a January effect was also
observed in both testing periods in the UK stock market, similar to the findings of DeBondt
& Thaler (1985). There could be many explanations for this anomaly, with Reinganum
(1983) mentioning that this effect could be due to the tax loss selling in December.
Nevertheless, the spike in stock returns in January is not significant enough to explain the
over-reaction.
The next section will outline the final concluding remarks. Whilst addressing the limitations
of the research, while also suggesting ways in which this research can be improved and be
more accurate and to better reflect the real world condition.
40
Chapter 5: Conclusion
5.1 Summary
The EMH was developed by Eugene Fama in 1970, with the fundamental idea that in the
environment of efficient markets, information gets reflected instantly into the market. Hence
no single investor should be able to earn excess returns, due to the unpredictability of the
capital markets. However, financial studies and literature over the last twenty years has been
dominated with anomalies, as recent studies now report inefficiencies in the capital markets,
supporting the fact that the EMH may not be a true reflection of the real world. Such studies
which reject the EMH has become the basis of behavioural finance, which states that
investors arent always rational in their decision making. Shiller (1989) comments that
investors take decisions dependent on their emotions, rather than acting on informed and
rational judgements. Many anomalies have been provided with sufficient explanations from
behavioural finance, some of which have been discussed in this dissertation (i.e. cyclical
effects, over-reactions and under-reactions).
The basic assumption of the EMH is that stock price movements are unpredictable, and you
cannot use historical data to forecast future price movements. As mentioned previously in this
paper, the weak-form efficiency of the EMH states that information is already shown in a
stocks price and any price movements are independent to future price changes. However, the
most noted implication of behavioural finance disputes against this basic principle of the
EMH, with many scholars identifying predictable behaviour in the stock markets. It has been
shown in this dissertation that the over-reactions and under-reactions have been subject of
most research, and these trading strategies such as momentum have been extensively tested
by many researchers. Many academics in the field report short-term momentum profits,
which earn abnormal returns, but it should be noted that these trends are due to the average
results of continuous tests during long testing periods, as these patterns do not occur
persistently. Nevertheless, studies such as Banz & Breen (1986) have been able to reduce or
completely diminish any biases from their research, with other scholars adjusting for factors
such as the size-effect.
The research conducted provides evidence towards the momentum strategy being used to
earn excess profits and therefore beating the UK stock market. With all Brexit portfolios
beating the market, and 11 out of 16 pre-Brexit portfolios outperforming the UK stock
market. Also. Further examination of the results identify a January effect in the constructed
41
portfolios, but this effect is not large enough to explain the overreaction. But the main cause
of momentum in the UK stock market is due to momentum effects being a robust feature in
the UK, as mentioned by Liu, Norman & Xu (1999), and with the UK markets showing
evidence of time series patterns and predictability, unlike the Japanese stock market which
was tested by Liu & Lee (2001).
5.3 Limitations of the study and suggestions for further research
Even though the intention of the empirical research is to be as accurate and detailed as
possible, some characteristics of the study should be taken into consideration. Due to the
limitations of this dissertation, only one event was tested, rather than taking into account
several events. Furthermore, due to time constraints, only 12 portfolios were created for
Brexit, rather than 16, therefore the research was not able to see returns during the 12-month
holding period. Moreover, each portfolio comprises of different stocks in the market, which
means all portfolios may not be similar in capitalisation and volume, which may create
inconsistencies within the results, as each portfolios return is calculated as the average of
each stocks CR in the specific portfolio. Also, with the methodology being based around a
zero-cost approach, the study does not consider real-world implications, such as broker fees
and stamp duty, as these transaction costs would run down the perceived abnormal returns.
Furthermore, the size-effect should also be noted, as all stocks are equally weighted to
simplify the research and analysis of the findings, and there was no control over size.
Zarowin (1990) found that the tendency for small firms to outperform large firms is not due
to over-reaction, but instead it is caused by the difference in size, as a result, the findings of
this study may not be a true reflection of the UK stock market.
Finally, recommendations for future research would be to further test emerging markets, as in
this study, the UK stock market is considered to be developed, thus markets are considered to
be more efficient than emerging markets, as a similar test conducted on emerging markets
may yield dissimilar results. Also, rather than testing the market as a whole, different sectors
and industries (i.e. mining, pharmaceutical etc) should be considered, as results may vary
in specific industries. On a final note the above limitations should also be addressed, for
further research purposes.
42
Notes
1
Jenson (1978) uses the symbol t for the information set. And the economic profit is the risk
adjusted returns net of all costs.
2
Malkiel (1992) uses the symbol for the information set. And the economic profit is the
risk adjusted returns net of all costs.
3
Commonly called bear or bull markets, these trends represent the main component of the
Dow Theory. They are long term, typically around 4 years in duration.
4
Referred to as corrections, these movements last only a few months. Typically, a secondary
downward movement in a bull market is referred to as a correction and a secondary upward
movement in a bear market is referred to as a bear trap.
5
Daily fluctuations that are considered random variations. Although these movements are not
essential to the theory, they are plotted to delineate primary and secondary trends.
6
A theory, which moves beyond the definition of the efficient market hypothesis, that states
that new information about any given firm is known with certainty, and is immediately priced
into that company's stock.
7
Contrarian is an investment style that goes against prevailing market trends by buying
poorly performing assets and then selling when they perform well.
8
Decile is a method of splitting up a set of ranked data into 10 equally large subsections. This
type of data ranking is performed as part of many academic and statistical studies in the
finance field. The data may be ranked from largest to smallest values, or vice versa.
9
Researchers such as Bondarenko (2003) and Hogan, Jarrow, Teo & Warachka (2004) have
developed statistical arbitrage trading models.
43
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UK Stock Market Data
Brexit T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb)
3515.45 3653.83 3697.19 3755.34 3768.14 3692.4 3873.22 3858.26 3953.42
Pre-Brexit T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb) K = 9 (Mar) K = 10 (Apr) K = 11 (May) K = 12 (Jun)
3570.58 3652.79 3434.66 3335.92 3484.6 3492.13 3444.26 3335.9 3345.84 3395.19 3421.7 3429.77 3515.45
Brexit Pre-Brexit
Appendix
R1 0.0379 R1 0.0225
R2 0.0117 R2 -0.0635
R3 0.0155 R3 -0.0296
R4 0.0034 R4 0.0427
R5 -0.0205 R5 0.0022
R6 0.0467 R6 -0.0139
periods Brexit and pre-Brexit

R7 -0.0039 R7 -0.0325
R8 0.0241 R8 0.0030
HPR(8) 0.1190 R9 0.0145
HPR(6) 0.0969 R10 0.0077
HPR(3) 0.0663 R11 0.0024
R12 0.0244
Appendix 1: UK stock market data for time

HPR(12) -0.0246
Accounting and Finance Dissertation (U21079)
HPR(9) -0.0574
HPR(6) -0.0425
48
HPR(3) -0.0708
T = 0 = Brexit (24/06/2016)
Stock price data
Name J = 3 (Mar) J = 2 (Apr) J = 1 (May) T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb)
Smurfit Kappa Group Plc (SKG) 1795 1812 1893 1651 1755 1885 1718 1795 1817 1884 2081 2119
Anglo American PLC (AAL) 552.1 763.4 600.1 726.9 830.5 779.8 967.6 1131 1185 1160 1358 1252.5
Antofagasta PLC (ANTO) 469.4 483.2 429 465.6 500.5 494.7 524 543 689 675 835 807.5
Ashtead Group PLC (AHT) 864 907.5 976 1064 1196 1265 1271 1278 1567 1580 1606 1635
3I Group PLC (III) 456.4 473.6 561.5 547.5 617 614.5 650.5 671 689 704 700 687.5
Blackrock Greater Europe Inv Tst (BRGE) 247 244.5 246.5 255 267.5 272 276.88 287 262 279.5 285 284.12
Blackrock World Mining Trust Plc (BRWM) 218.5 250.5 225.5 270.25 294.5 281 302.25 327.75 327.25 336.5 382 374.5
Compass Group PLC (CPG) 1228 1219 1287 1422 1436 1442 1495 1481 1371 1501 1412 1498
Polar Capital Partners Limited (PCT) 577 566 594.5 625 733 731.5 810.5 795 827 846.5 874.5 936
Spirax Sarco Engineering Plc (SPX) 3640 3415 3450 3740 3983 4334 4495 4412 4271 4184 4305 4449
Formation Holding
R1 0.0086 R1 0.0728
R2 0.0125 R2 0.0402
Student ID: UP687606
R3 0.0468 R3 0.0329
FPR(3) 0.0690 R4 0.0165
R5 0.0219
R6 0.0110
R7 0.0497
Appendix 2: Brexit portfolio stock market data of 3

R8 0.0146
HPR(8) 0.2892
month formation and 3, 6 and 8 month holding period.

HPR(6) 0.2105
HPR(3) 0.1526
T = 0 = Brexit (24/06/2016)
Stock price data
Name J = 6 (Dec) J = 5 (Jan) J = 4 (Feb) J = 3 (Mar) J = 2 (Apr) J = 1 (May) T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb)
Compass Group PLC (CPG) 1175 1203 1266 1228 1219 1287 1422 1436 1442 1495 1481 1371 1501 1412 1467
Acacia Mining PLC (ACAA) 180 206.2 248.2 281.3 351.8 305.5 451.1 559.5 460.7 497.5 518.5 369.9 373.8 430.5 535
Sage Group PLC (SGE) 603.5 621 596.5 629 592 613 645 712.5 725 738 721.5 657.5 655 613 642.5
Drax Group (DRX) 244.4 252.4 232.8 272.1 319.6 309 323.7 341.8 303.9 305.4 316.9 283.6 377.9 370.4 340.9
Evraz Plc (EVRE) 73.25 62.35 68.45 90 142 111 137.2 171.2 128 161 205.1 239.8 221.8 223 228.9
JPMorgan Global Emerging Marketss Investment Trust Plc (JEMI) 87.12 76.5 83.5 93.5 98 89.75 100 115.25 114 118.38 126 113.5 115 120.75 124.5
John Menzies PLC (MNZS) 366.65 361.79 403.76 419.44 440.2 450.14 481.94 521.26 527 515.08 496.75 525 596 597 589
Schroder Oriental Income Fund (SOI) 178 170.5 179.5 186.25 191.75 186.75 204 227 224.5 233.5 239 227 232 231 243.5
Smiths Group PLC (SMIN) 939.5 943.5 1002 1076 1108 1122 1153 1263 1341 1464 1418 1411 1416 1501 1482
John Wood Group PLC (WG) 612.5 643 624 615 624.5 616 688 659.5 696.5 759.5 769 823 876 838 735.5
Formation Holding
R1 0.0177 R1 0.0668
R2 0.0350 R2 -0.0074
R3 0.0380 R3 0.0517
formation and 3, 6 and 8 month holding period.

R4 0.0386 R4 0.0007
R5 0.0006 R5 -0.0449
R6 0.0920 R6 0.0539
FPR(6) 0.2408 R7 -0.0044
49
R8 0.0082
Appendix 3: Brexit portfolio stock market data of 6 month

HPR(8) 0.1258
HPR(6) 0.1216
HPR(3) 0.1135
T = 0 = Brexit (24/06/2016)
Stock price data
Name J = 9 (Sep) J = 8 (Oct) J = 7 (Nov) J = 6 (Dec) J = 5 (Jan) J = 4 (Feb) J = 3 (Mar) J = 2 (Apr) J = 1 (May) T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb)
JPMorgan Asian Investment Trust (JAI) 202.88 216.12 215.88 219 215 200 217 211 210.75 237 253 272.12 278 291.5 269.25 273 280.5 296
Melrose Industries PLC (MRON) 49.82 50.2 54.73 54.86 56.04 61.99 67.2 70.36 72.44 80.25 129.02 148 174.5 168.75 183.25 197.75 195.25 210.75
Evraz Plc (EVRE) 72.9 84.75 84.45 73.25 62.35 68.45 90 142 135 137.2 171.2 128 161 205.1 239.8 221.8 223 230.4
John Menzies PLC (MNZS) 365.1 356.93 328.88 366.65 378.25 403.76 419.44 440.2 450.14 481.94 521.26 527 515.08 496.75 525 596 597 589.5
Merlin Entertainments PLC (MERL) 371.6 414.8 412.2 455.5 456 458.8 463.5 431.5 432 440.3 473.2 480.1 439.6 460.8 435.8 448.6 477.1 498.3
holding period.
Acacia Mining PLC (ACAA) 248 193 173.6 180 206.2 248.2 281.3 351.8 345 451.1 559.5 460.7 497.5 518.5 369.9 373.8 430.5 535
Kingspan Group (KSP) 21.6 22.01 24.9 54.9 45 23.28 23.2 23 25.15 19.61 20.8 24.77 24.14 22.1 25.15 25.81 26.89 29.15
Sage Group PLC (SGE) 499.4 545 586.5 603.5 621 596.5 629 592 613 645 712.5 725 738 721.5 657.5 655 613 642.5
Blackrock Greater Europe Inv Tst (BRGE) 236 246.25 246 259 246.25 248.5 247 244.5 246.5 255 267.5 272 276.88 287 262 279.5 285 284.5
North American Income Tst (The) Plc (NAIT) 761.5 820 824 833.5 821 855 889 899 899 955 1070 1081 1090 1124 1183 1254 1232 1245
Formation Holding
R1 0.0408 R1 0.1138
R2 0.0007 R2 -0.0144
R3 0.0481 R3 0.0181
R4 0.0022 R4 0.0236
R5 0.0181 R5 -0.0350
R6 0.0487 R6 0.0404
R7 0.0231 R7 0.0080
R8 0.0069 R8 0.0440
of 9 month formation and 3, 6 and 8 month

R9 0.0738 HPR(8) 0.2087
Appendix 4: Brexit portfolio stock market data

FPR(9) 0.2923 HPR(6) 0.1485
HPR(3) 0.1177
T = 0 = Brexit (24/06/2016)
Stock price data
Name J = 12 (Jun) J = 11 (Jul) J = 10 (Aug) J = 9 (Sep) J = 8 (Oct) J = 7 (Nov) J = 6 (Dec) J = 5 (Jan) J = 4 (Feb) J = 3 (Mar) J = 2 (Apr) J = 1 (May) T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb)
Dignity PLC (DTY) 2143 2337 2435 2430 2431 2482 2512 2510 2513 2479 2440 2541 2570 2699 2689 2803 2653 2441 2471 2445 2506
F&C Global Smaller Companies (FCS) 984.5 975 970 961 965 992.5 995 955 962 987 1001 1015 1016 1065 1120 1151 1167 1198 1238.5 1222 1263
North American Income Tst (The) Plc (NAIT) 805 803.5 801.5 805 820 824 830 860 861 889 899 899 955 1070 1081 1090 1124 1183 1254 1232 1247
WPP PLC (WPP) 1426 1470 1410 1448 1458 1535 1542 1543 1544 1627 1624 1592 1594 1698 1756 1814 1778 1709 1816 1844 1872
Ros Agro PLC (AGRORq) 8.45 8.39 7.99 8.4 9.5 12.6 13.75 16 17.2 16.85 15.2 13.2 14.8 14.45 13.8 13.3 13.05 12.6 13.3 14.35 13.95
Burford Capital Ltd (BURF) 153.75 166 165 171 187.5 187 191 231 225 286 294 320 320.5 389 391 415 481 469.5 572.5 650 672.5
Redde PLC (REDD) 135.755 141.25 159 161 177 174.75 204 192 198.75 167 155 165.5 157 186.5 200.25 200 177 161 163.5 165.5 176
James Latham PLC (LTHM) 692.5 730 725 711 660 680 677.5 672 662.5 675 715 690 620 652.5 705 660 627.5 695 750 802.5 875
Costain Group (COSG) 328 334 388 370 376 357 373.5 361 361 355.5 356 362.75 372 339.75 352.5 359.5 370 353.25 353.75 369 385
International Quantum Epitaxy (IQE) 22.5 25.25 26 25 24.75 22 17.5 20.5 19.25 23.5 20 19.5 17.5 24.25 25.75 30.5 29.75 34.25 38 39.5 46.5
Formation Holding
R1 0.0416 R1 0.0616
R2 0.0137 R2 0.0235
R3 0.0004 R3 0.0237
R4 0.0026 R4 -0.0138
R5 0.0218 R5 -0.0198
R6 0.0122 R6 0.0477
R7 0.0006 R7 0.0129
R8 0.0004 R8 0.0302
R9 0.0189 HPR(8) 0.1755
Appendix 5: Brexit portfolio stock market data of 12

R10 0.0018 HPR(6) 0.1266
R11 0.0130 HPR(3) 0.1123
month formation and 3, 6 and 8 month holding period.

R12 0.0025
FPR(12) 0.1364
50
T = 0 = Pre Brexit (24/06/2015)
Stock Market Data
Name J = 3 (Mar) J = 2 (Apr) J = 1 (May) T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb) K = 9 (Mar) K = 10 (Apr) K = 11 (May) K = 12 (Jun)
Lamprell Plc (LAM) 119.5 140.75 152.5 151 146 132.75 114 120 107 99.5 83 98 91.75 86.75 75.75 71.25
Amerisur Resources Plc (AMER) 30 34 35.75 36.5 33.5 26.25 25 28 25 24.5 25 27.75 29 27.5 27 26.5
Dechra Pharmaceuticals PLC (DPH) 1007 1023 1029 983 984.5 950.5 939 969.5 983 1093 998 1144 1206 1106 1177 1172
Greencore Group (GNC) 265.14 291.7 270.73 258.23 260.2 244.49 224.49 248.36 277.72 291.37 319.74 312.83 308.39 296.72 283.48 252.88
Telecom Plus (TEP) 870 767 814 990 1214 1114 1117 1051 1131 1071 1010 850 920.5 931 1032 1042
Centrica PLC (CNA) 253 255.4 277.6 263.8 266.5 243.2 229.2 226.1 218.1 218.1 204.8 208 227.7 238.4 203.8 225.5
Go-Ahead Group (GOG) 2330 2470 2655 2634 2550 2531 2456 2425 2628 2669 2449 2580 2650 2565 2565 1956
Micro Focus International (MCRO) 1181 1257 1324 1361 1398 1305 1203 1256 1283 1595 1386 1475 1570 1529 1630 1613
Intermediate Capital Group PLC (ICP) 505.46 529.56 601.34 551.64 583.81 534.28 516.77 566.3 613.32 627.33 582.3 578.3 618.82 614.32 667.85 490.56
Interserve (IRV) 580 579.5 620 660.5 645.5 584.5 574 556.5 531 520.5 466.4 435.2 433.8 427.3 334.2 260.25
Formation Holding
R1 0.0281 R1 0.0238
R2 0.0555 R2 -0.0543
R3 0.0139 R3 -0.0362
FPR(3) 0.1003 R4 0.0065
R5 0.0449
R6 0.0502
R7 -0.0910
R8 0.0240
R9 0.0431
R10 -0.0299
R11 0.0218
R12 -0.1246
Appendix 6: Pre-Brexit portfolio stock market data of 3

HPR(12) -0.1317
HPR(9) 0.0007
month formation and 3, 6, 9 and 12 month holding period.

HPR(6) 0.0308
HPR(3) -0.0668
T = 0 = Pre Brexit (24/06/2015)
Stock Market Data
Name J = 6 (Dec) J = 5 (Jan) J = 4 (Feb) J = 3 (Mar) J = 2 (Apr) J = 1 (May) T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb) K = 9 (Mar) K = 10 (Apr) K = 11 (May) K = 12 (Jun)
Intertek Group PLC (ITRK) 2334 2293 2530 2601 2612 2501 2550 2447 2536 2431 2625 2827 2777 2830 2922 3167 3257 3137 3479
Smiths Group PLC (SMIN) 1098 1127 1155 1118 1145 1199 1229 1129 1129 1005 962 1033 939.5 943.5 1002 1076 1108 1122 1153
Costain Group (COSG) 279.75 287.75 302 315 318.75 339 328 334 388 363 376 357 373.5 352 348.5 355.5 314.25 362.75 315.75
month holding period.

Standard Life PLC (SL) 410.73 413.7 437.11 475.6 467.9 487.7 444 454.4 416.1 387.8 420.9 416.5 389.7 363.5 333.5 356.1 326.1 339.1 293.6
Direct Line Insurance Group PLC (DLGD) 274.8 294.8 308.86 304.63 304.72 322.01 319.96 348.64 336.45 357.22 375.22 392.28 388.28 356.93 370.27 360.78 352.69 365.75 336.03
Next PLC (NXT) 6608 7061 7315 7211 7244 7402 7533 7928 7883 7551 798 7849 7225 6925 6765 5400 5085 5440 4930
British American Tobacco PLC (BATS) 3500 3752 3782 3732 3607 3605.5 3515 3801 3479 3643 3859.5 3868 3771 3897 3925.5 4090 4170 4198 4843
Talk Talk Telecom Group Plc (TALK) 304.1 318.4 339.1 344.1 365.7 400 382.5 301.4 300.9 314.5 253 240 217.4 220.2 238.1 237.1 267.4 240.2 219.2
United Business Media PLC (UBM) 491.35 538.55 551.77 558.04 574.14 566.01 543.63 540.58 500.91 493.9 520.75 514.65 535.5 530.92 600.59 611.27 578.72 599.06 641
WH Smith (SMWH) 1351 1350 1343 1421 1445 1548 1528 1581 1500 1564 1705 1735 1769 1842 1807 1818 1675 1751 1574
Formation Holding
R1 0.0450 R1 0.0261
R2 0.0347 R2 -0.0214
R3 0.0009 R3 -0.0198
R4 0.0002 R4 -0.5225
R5 0.0156 R5 0.3815
data of 6 month formation and 3, 6, 9 and 12

Appendix 7: Pre-Brexit portfolio stock market
R6 0.0002 R6 -0.0460
FPR(6) 0.0995 R7 -0.0068
R8 0.0028
R9 -0.0481
R10 -0.0197
R11 0.0240
51
R12 0.0129
HPR(12) -0.4030
HPR(9) -0.4128
HPR(6) -0.3806
HPR(3) -0.0158
T = 0 = Pre Brexit (24/06/2015)

Stock Market Data
Name J = 9 (Sep) J = 8 (Oct) J = 7 (Nov) J = 6 (Dec) J = 5 (Jan) J = 4 (Feb) J = 3 (Mar) J = 2 (Apr) J = 1 (May) T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb) K = 9 (Mar) K = 10 (Apr) K = 11 (May) K = 12 (Jun)
Sage Group PLC (SGE) 365.4 377.7 407.1 465.7 480.2 484.5 466.7 486 568.5 512.5 521 515.5 499.4 545 586.5 603.5 621 596.5 629 592 613 645.5
EasyJet PLC (EZJ) 1423 1500 1653 1671 1862 1732 1882 1813 1609 1646 1644 1683 1777 1750 1653 1740 1548 1506 1519 1473 1533 1086
Novae Group (NVA) 508.48 525.52 534.99 564.58 568.13 610.74 676.08 678.98 707.21 691.15 705.27 826.46 842.04 844.96 854.2 868.32 803.1 760.75 854.2 803 840 750.5
Lookers (LOOK) 134 138.75 138 130 149.75 153.75 143.75 156.5 161.75 158.5 162.25 162 166.7 175.9 173.1 185 158 154.9 158.4 139.1 149.7 107
Legal & General Group PLC (LGEN) 228.9 231 246.7 248.6 267.9 279.5 278.6 260 265.8 248.9 260.7 252.7 238.1 261.6 271.5 267.8 243.5 227 235.2 223.1 239.4 190.7
WPP PLC (WPP) 1240 1218 1340 1345 1466 1535 1531 1526 1540 1426 1470 1351 1373 1458 1535 1563 1517 1523 1627 1596 1592 1552
Reckitt Benckiser Group PLC (RB) 5229.1 5131.36 5136.24 5210 5630 5860 5800 5826 5905 5988 6149 5757 5987 6344 6230 6281 6234 6560 6730 6654 6875 7490
ITV PLC (ITV) 194.19 189.71 200.17 201.11 205.6 210.55 236.34 242.75 260.65 252.04 268.69 239.5 235.48 241.6 259.41 264.77 255.39 237.97 230.88 225.2 214.8 179.7
Mondi PLC (MNDI) 1011 1053 1095 1050 1189 1330 1298 1323 1476 1571 1540 1478 1383 1504 1544 1334 1136 1292 1336 1308 1346 1395
Persimmon PLC (PSN) 1262.72 1384.83 1451.09 1493.69 1506.94 1669.75 1663 1700 1962 1975 2047 2103 2008 1994 1915 2027 2036 2184 2085 1987 2102 1447
month holding period.

Formation Holding
R1 0.0130 R1 0.0202
R2 0.0371 R2 -0.0278
R3 0.0143 R3 0.0098
R4 0.0710 R4 0.0403
R5 0.0390 R5 -0.0065
R6 0.0078 R6 0.0074
R7 0.0026 R7 -0.0400
R8 0.0307 R8 0.0326
R9 0.0009 R9 0.0235
FPR(9) 0.2361 R10 -0.0270
R11 0.0325
R12 -0.0446
data of 9 month formation and 3, 6, 9 and 12

Appendix 8: Pre-Brexit portfolio stock market
HPR(12) 0.0157
HPR(9) 0.0581
HPR(6) 0.0428
HPR(3) 0.0015
T = 0 = Pre Brexit (24/06/2015)
Stock Market Data
Name J = 12 (Jun) J = 11 (Jul) J = 10 (Aug) J = 9 (Sep) J = 8 (Oct) J = 7 (Nov) J = 6 (Dec) J = 5 (Jan) J = 4 (Feb) J = 3 (Mar) J = 2 (Apr) J = 1 (May) T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb) K = 9 (Mar) K = 10 (Apr) K = 11 (May) K = 12 (Jun)
International Consolidated Airlines Group S.A. (ICAG) 370.5 330.8 361.2 367.1 409.2 457.5 486.1 544.5 580 603 545 546 494.7 534 539 588 582.5 567 610.5 539.5 549 553.5 525 535.5 370
Barratt Developments PLC (BDEV) 373.7 349.2 369.9 396.1 418.8 460.3 471 458.4 515.5 528.5 539.5 592 614.5 625.05 629.48 634.4 612.5 601 626 599.5 590 560.5 532.5 592 405.4
UK Gilt Futures - Mar 17 (FLGH7) 109.92 110.68 114.4 113.14 115.1 118.37 119.37 123.87 119.37 120.75 118.12 118.67 115.7 117.3 118.06 119.06 117.75 118.63 116.77 120.32 122.75 121.22 119.6 121.12 128.49
Taylor Wimpey PLC (TW) 104.34 101.87 104.89 103.24 108.37 122.83 126.83 123.93 132.26 141.78 172.12 174.96 177.15 185.35 191.93 186.4 188.79 185.54 193.65 183.45 177.54 181.44 175.72 195.84 132.3
Carnival PLC (CCL) 2208 2287 2246 2464 2488 2820 2919 2997 2922 3296 3249 3167 3249 3552 3320 3423 3617 3465 3866 3480 3578 3752 3397 3409 3310
Dixons Carphone PLC (DC) 322.6 334.7 344.6 366.3 395.2 423.3 462.4 435 440.6 412.7 424.3 475.4 453.5 455.8 431.4 424.4 461.3 484.7 500 473.7 435.7 426.3 425.2 440 320
Ros Agro PLC (AGRORq) 6.4 7 6.7 7.25 6.5 6.41 5.15 5.4 6.3 6.05 8.51 8.5 8.45 8.39 7.99 8.4 9.5 12.6 13.75 13.6 17.2 16.85 15.2 13.2 14.8
Burford Capital Ltd (BURF) 120.5 119.5 120 122 121 121 120.88 133 137.25 144.5 144.25 140.5 153.75 166 165 171 187.5 187 195.25 225 220 286 294 320 320.5
Redde PLC (REDD) 59.812 54.6 59.067 73.462 77.462 77.929 76.936 92.075 94.061 113.171 119.945 120.616 128.062 135.755 141.25 159 161 177 174.75 206 179.5 167 155 165.5 157
James Latham PLC (LTHM) 497.5 485 502.5 497.5 490 530 565 625 612.5 622.5 672.5 685 692.5 730 712.5 692.5 660 680 677.5 692.5 652.5 675 715 690 620
Formation Holding
R1 0.0017 R1 0.0649
R2 0.0116 R2 -0.0404
R3 0.0623 R3 0.0233
R4 0.0258 R4 0.0291
R5 0.0989 R5 -0.0184
R6 0.0402 R6 0.0711
R7 0.0335 R7 -0.0674
R8 0.0039 R8 -0.0017
R9 0.0717 R9 0.0323
R10 0.0007 R10 -0.0607
R11 0.0059 R11 0.0197
R12 0.0096 R12 -0.1218
FPR(12) 0.4261 HPR(12) -0.0855
HPR(9) 0.0872
HPR(6) 0.1313
HPR(3) 0.0457
9
6
3
9
6
3
9
6
3
12
12
12
Appendix 9: Pre-Brexit portfolio stock market data of5212

J-month
J-month
J-month
month formation and 3, 6, 9 and 12 month holding period.

Expected value:
Expected value:
Expected value:
0
0
HPR(3)
0.04600
0.05140
0.04720
0.08630
HPR(6)
HPR(8)
0.02970
0.05160
0.02470
0.11360
0.05650
0.08970
0.00680
0.17020
Degrees of freedom:
Standard Deviation:
Average value:
p-value:
t-value:
Degrees of freedom:
Standard Deviation:
Average value:
p-value:
t-value:
Degrees of freedom:
Standard Deviation:
Average value:
p-value:
t-value:
Appendix 12: Brexit 8-month holding period statistical test data


3
3
3
0.04084
0.07451
2.68856
0.05490
0.06865
0.09994
2.35400
0.08080
0.01919
0.00920
6.01610
0.05773
Expected value: 0
J-month HPR(3)
3 0.00400 Average value: 0.06195
6 0.05500
9 0.07230 Degrees of freedom: 3
12 0.11650 t-value: 2.66399
p-value: 0.07608
Standard Deviation 0.04651
Appendix 13: Pre-Brexit 3-month holding period statistical test data
Expected value: 0
J-month HPR(6)
3 0.07330 Average value: -0.00143
6 -0.33810
12 0.17380 t-value: 0.01245
p-value: 0.99085
Expected value: 0
J-month HPR(9)
3 0.05810 Average value: -0.00930
6 -0.35540
12 0.14460 t-value: 0.07965
p-value: 0.94153
Expected value: 0
J-month HPR(12)
3 -0.10710 Average value: -0.12653
6 -0.37840
12 -0.06090 t-value: 1.41492
p-value: 0.25203
53

Amanpreet Singh Dissertation

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Amanpreet Singh Dissertation

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Verfügbare Formate

Using momentum trading strategy to beat the UK

stock market: A challenge to the Efficient Market

Supervised by Lena Itangata

This dissertation is submitted in part fulfilment of BA(Hons)

Word Count: 9,808 (excluding bibliography/references, notes, appendices, cover pages,

1.1 Background to the study 6

1.3 Research objectives 7

1.4 Importance of the study 8

1.5 Structure of the dissertation 8

CHAPTER 2: LITERATURE REVIEW 10

2.1 An introduction to the Efficient Market Hypothesis (EMH) 10

2.2 Testing the efficient market hypothesis 12

2.4 Behavioural Biases 20

3.3 Time period to test 25

3.4 Formation Period and Holding Period returns 25

3.5 The Zero-Cost Trading Strategy 27

3.6 Validity test 28

3.7 Strategies characteristics 28

3.8 Hypothesis Test 28

CHAPTER 4: RESULTS & ANALYSIS 30

4.2 Testing the validity of the research results 37

4.4 The January Effect 38

4.5 Effect of the EU Referendum on the test results 39

4.6 Summary of research results 40

5.3 Limitations of the study and suggestions for further research 42

1.1 Background to the study

1.3 Research objectives

1.4 Importance of the study

1.5 Structure of the dissertation

Chapter 2: Literature review

Chapter 4: Results and analysis

Chapter 2: Literature review

2.1 An introduction to the Efficient Market Hypothesis (EMH)

2.2 Testing the efficient market hypothesis

2.2.1 Testing the weak-form efficiency

2.2.1.1 The Filter approach

And the PACF is defined as:

Where P(W | Z) is the best linear projection of W on Z. for instance P(W | Z) =

2.2.1.2 The Dow Theory

2.2.2 Testing the semi-strong form efficiency

2.2.2.1 Event Studies

2.2.2.2 Stock Splits

Figure 4 All splits Figure 5 Dividend increases

2.2.3 Testing the strong-form efficiency

2.3.1 The calendar effect

Nonetheless, researchers are passionate by the possibility of finding systematic trends.

2.3.1.1 The January effect

2.4 Behavioural Biases

2.4.1 Under-reactions, over-reactions and contrarian strategy

2.4.2 Momentum trading

Figure 6 Source: Jegadeesh & Titman

3.3 Time period to test

3.4 Formation Period and Holding Period returns

Below are some examples of the FPR over specific months:

FPR over a three-month formation period: FPR(3)=[(1+ R1)(1+ R2)(1+ R3)] -

3.5 The Zero-Cost Trading Strategy

1. As mentioned already, it is a zero initial cost, self-financing trading strategy.

2. It has positive expected discounted profits in the limit.

3. Furthermore, it has a probability of a loss converging to zero.

3.6 Validity test

3.7 Strategies characteristics

3.8 Hypothesis Test

3.8.1 Null Hypothesis (H0)

H0: Constructed Portfolio Return UK Stock Market Return 0.