MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY ---o0o--- TA THU TIN WHETHER MOMENTUM OR CONTRARIAN PHENOMENON EXIST IN VIETNAM STOCK MARKET MAJOR: FINANCE – BANKING MAJOR CODE: 60.12 MASTER THESIS ADVISOR: Ph. TRAN PHUONG NGOC THAO HO CHI MINH CITY, 2011 TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT At first, I would like to express my deep gratitude to my instructor, Dr. Tran Phuong Ngoc Thao for her intensive guidance and valuable suggestions during time of my study. I would like to thank Dr.
Vo Xuan Vinh for valuable comments and suggestions he share with me. In addition, I also give my appreciation to all of my lecturers at Faculty of Banking and Finance, University of Economics Hochiminh City for their teaching and knowledge during my master course. My sincere thank goes to Nguyen Hiep Phat, my colleague at Au Viet Securities, he spent a lot of time to help me make a software program to process raw data in this thesis. Finally, I am thankful to my family for giving me facilitation to complete my thesis.
i TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT This thesis investigates whether momentum or contrarian phenomenon exist on Vietnamese Stock Market over the period from January 2005 to June 2011. We employ the famous methodology by Jegadeesh and Titman (1993) to calculate the profit of momentum and contrarian strategies which were built base on the historical return of 424 stocks listed on Ho Chi Minh Stock Exchange and Ha Noi Stock Exchange. We found that all 16 trading contrarian strategies always make abnormal profit with statistical significance at the level of 10%. The most profitable contrarian strategy with portfolio based on 6 month formation and 3 month holding has a average monthly return of 2,829% (equivalent to annually return of 33,95%) with significance level of 2%.
Our research demonstrates that the abnormal profit on trading contrarian strategy can not be accounted for by beta-risk as well as market size. But we found a evidence of P/B ratio explaining contrarian phenomenon on Vietnamese Stock Market. Key words: Momentum; Contrarian strategies. ii TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS ACKNOWLEDGEMENT……………………………………………………………… i ABSTRACT…………………………………………………………………………….
ii TABLE OF CONTENTS……………………………………………………………… iii LIST OF FIGURES……………………………………………………………………. vi LIST OF TABLES……………………………………………………………………. vii ABBREVIATIONS…………………………………………………………………… viii 1. Overview of Momentum and Contrarian strategies…………………………….
Research Methodology and Scope………………………………………………. Vietnamese Stock Market………………………………………………………. Efficient Market Hypothesis……………………………………………………. Data Collection and Research Method………………………………………….
Adjusted Stock Prices…………………………………………………. Raw Data Processing…………………………………………………………. Why does the contrarian phenomenon exist in Vietnam stock market?. Some factors may account for the contrarian phenomenon in Vietnam Stock Market………………………………………………………………………….
36 iii TIEU LUAN MOI download : skknchat@gmail. Price to Book……………………………………………………………. Implications of Research………………………………………………………. Limitations of Research……………………………………………………….
44 REFERCENCES……………………………………………………………………… 45 APPENDIX…………………………………………………………………………… 48 Table A1: List of 424 investigated stocks……………………………………………………48 Table B1-Table B16: The average monthly return of Winner and Loser Portfolios in 16 strategies……………………………………………………………………. 59 Table C1-Table C16: The average monthly return of Loser portfolio compare to the one of Winner portfolio in 16 strategies…………………………………. 75 Table D11: Estimation of Beta of Winner portfolio in J=3/K=3 strategy……………… 83 Table D12: Estimation of Beta of Loser portfolio in J=3/K=3 strategy………………. 84 Table D21: Estimation of Beta of Winner portfolio in J=6/K=3 strategy……………… 85 Table D22: Estimation of Beta of Loser portfolio in J=6/K=3 strategy……….86 Table D31: Estimation of Beta of Winner portfolio in J=9/K=3 strategy……………….87 Table D32: Estimation of Beta of Loser portfolio in J=9/K=3 strategy…………………88 Table D41: Estimation of Beta of Winner portfolio in J=12/K=3 strategy…………….
89 Table D42: Estimation of Beta of Loser portfolio in J=12/K=3 strategy……………….90 Table E1: Average Market Capitalisation of Loser portfolio compare to Market Capitalisation of Winner portfolio in J=3/K=3 strategy………………………………….91 Table E2: Average Market Capitalisation of Loser portfolio compare to Market Capitalisation of Winner portfolio in J=6/K=3 strategy………………………………….91 iv TIEU LUAN MOI download : skknchat@gmail.com Table E3: Average Market Capitalisation of Loser portfolio compare to Market Capitalisation of Winner portfolio in J=9/K=3 strategy…………………………………. 92 Table E4: Average Market Capitalisation of Loser portfolio compare to Market Capitalisation of Winner portfolio in J=12/K=3 strategy……………………………….92 Table F1: The average P/B ratio of Loser portfolio compare to the average P/B ratio of Winner portfolio in J=3/K=3 strategy……………………….93 Table F2: The average P/B ratio of Loser portfolio compare to the average P/B ratio of Winner portfolio in J=6/K=3 strategy………………………. 93 Table F3: The average P/B ratio of Loser portfolio compare to the average P/B ratio of Winner portfolio in J=9/K=3 strategy……………………….94 Table F4: The average P/B ratio of Loser portfolio compare to the average P/B ratio of Winner portfolio in J=12/K=3 strategy…………………….94 v TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 1. VN-Index Chart over the period from July 2000 to September 2011………….
Formation and Holding periods in two strategies……………………………. The screen of the Analyzing Stock Price Data program after importing data from Excel file……………………………………………………………. The screen of the Analyzing Stock Price Data after stocks are ranked in descending order on the basis of their average monthly returns…………….3: The screen of Stock Grouping program shows the Winner and Loser portfolios, and their average returns…………………………………………….27 vi TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 3. Adjusting price of KDC share………………………………………………….
Adjusting price of OPC share…………………………………………………. The average return of Winner and Loser Portfolios and their difference in J=3/K=3 Strategy (Formation Period: 3 months; Holding Period: 3 months)……. Summary of the average monthly return of loser and winner portfolio; and their differences (profitability of contrarian strategies) for 16 strategies over the period from 01/2005 to 06/2011………………………………………………. Monthly and annually profitability of 16 contrarian strategies are ranking in descending and their significances……………………………………….
Beta coefficient after perform regression………………………………………. The comparison in average market capitalization between loser and winner portfolios and their differences………………………………………. The comparison in average P/B ratio between loser and winner portfolios…41 vii TIEU LUAN MOI download : skknchat@gmail.com ABBREVIATIONS CAPM Capital Asset Pricing Model EMH Efficient Market Hypothesis HOSE Ho Chi Minh City Stock Exchange HNX Ha Noi Stock Exchange VND Vietnam Dong viii TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1: INTRODUCTION 1.1 Overview of Momentum and Contrarian Strategies In 1970, Efficient Market Hypothesis (EMH) developed by Professor Eugene Fama proclaimed that in the efficient market no one could consistently beat the market and stock prices follow a random walk. Thus, future prices of stocks could not be predicted from their past prices, it means that the abnormal return from trading should be zero.
However, a lot of investors and researchers have doubts about the efficient market hypothesis both empirically and theoretically. They always try to find some abnormal returns to prove the inefficiency of the markets. Consequently, forecasting the price movements in stock markets has become a major challenge for investors, brokers and speculators. Studying the movement of stock prices become one of the most attractive fields of research due to its commercial applications and benefits it offers.
Recently, there are many researchers and traders have studied stock price predictions such as Fundamental Analysis, Technical Analysis, CANSLIM, etc… And one of the most attractive trading strategies is momentum (and contrarian) strategy. The momentum strategy appeared firstly in the 1960s. However, it became widely known only in the early 1990s after Narasimham Narasimhan Jegadeesh and Sheridan Titman published their study. Momentum and contrarian strategies are two opposite investment strategies which use historical price/return data in order to forecast the future development of stock performance to make excess returns.
Momentum investing strategy, also sometimes known as “Trend following”, believes that stocks which have good performance in the past will keep doing so in the future, it buys (go long) stocks that have outperformed in the recent past, and short sell (go short) those that have underperformed over the same period. In contrast, a contrarian strategy believes that stocks which have good historical performance will be bad in the future, so it suggests short selling past winning stocks and buying past losing stock. The contrarian strategy was introduced first 1 TIEU LUAN MOI download : skknchat@gmail.com by DeBondt and Thaler in 1985, they report that long term past losers outperform long term past winners over the subsequent three to five years. After the appearance of this strategy, a lot of studies were carried out to prove or deny abnormal returns.
However, most momentum strategy studies have concentrated exclusively on the US market and only a few authors have touched on non-US stock exchanges. Among non-US studies, the majority of papers investigated momentum in developed markets rather than in emerging markets. As momentum profits may be explained by market inefficiency, we hypothesize that underdeveloped stock exchanges may show higher momentum due to their lower efficiency level. In this thesis we will investigate two types of investment strategies: momentum and contrarian strategy in the Vietnamese stock market.2 Research Objective In this thesis we test whether the momentum (or contrarian) strategy make abnormal over time horizons by examining portfolios which are formed on the historical returns, with the top decile of the ranked stocks labelled the winner portfolio and the bottom decile labelled the loser portfolio.
The Efficient Market Hypothesis predicts that these winner/loser portfolios will yield zero profits, therefore if we find out that the momentum or contrarian momentum exist on Vietnam Stock Market, we have an evidence prove that Vietnamese Stock Market is not a weak form of Efficient Market Hypothesis. This study has three main following objectives: 1. Investigating whether the momentum or contrarian phenomenon exist on the Vietnamese Stock Market? 2. Determining factors account for the momentum or contrarian phenomenon.
2 TIEU LUAN MOI download : skknchat@gmail.com Research Questions Three above research problems lead to the following research questions: 1. Based on historical stock price data in Vietnamese stock market, would momentum (or contrarian) strategy make abnormal profit? 2. Why does Vietnamese stock market have momentum/contrarian phenomenon? 3. Which factors explain the abnormal return yielded by momentum/contrarian strategy? 1.3 Research Methodology and Scope The object of this research is market prices of 424 listed stocks in Ho Chi Minh Stock Exchange (HOSE) and Ha Noi Stock Exchange over the period from January 2005 to June 2011.
In this thesis, we use the famous method which was proposed by Narasimhan Jegadeesh and Sheridan Titman in 1993 to test the profitability of momentum (contrarian) strategies. In each month we form a winner portfolio with 10% top stocks with highest performance and loser portfolio with 10% top bottom stocks with lowest performance. Then we make a comparison the average past return of stocks in the winner portfolio with these in the loser portfolio in next K months. In this thesis we use two software programs to analysis data: Analyzing Stock Price Data and SPSS.
Analyzing Stock Price Data is a small software composed by Nguyen Hiep Phat an Information Technology Engineer working at Au Viet Securities Corporation. This software ranked stocks ascending based on the average past returns. Next, it build winner and loser portfolio. The winner portfolios consist of the top decile which comprises the stocks with the highest performance in the previous J months, and the loser portfolios consist of the bottom decile which comprises the stocks with the lowest performance.
Then it makes a comparison between the average past return of stocks in the winner portfolio and these in the loser portfolio. 3 TIEU LUAN MOI download : skknchat@gmail.com We use SPSS software to perform the paired sample t-test in to make comparison between the average returns, market sizes and P/B ratios of loser portfolio and these of winner portfolio. We also use ordinary least square regression in SPSS to estimate the market risk (beta) of loser portfolio and winner portfolio.4 Thesis Structure: The thesis goes through 5 following chapters. Introduction: This chapter introduces research background of the study, research problems, research objectives, data and research methodology.
Furthermore, this chapter gives a little introduction about Vietnamese Stock Market. Literature review: This chapter will clarify what has already been observed and documented in the area of momentum and contrarian phenomena.