Medium-term momentum analysis of growth, income and value stocks

By Riya Jain and Priya Chetty on March 25, 2021

Stock market volatility is randomly present in an effective and competitive financial market. Momentum analysis and medium-term momentum analysis refers to the process of examining the past performance of the stocks for a specified period in order to make sound investment decisions. It implies that stocks having a higher return in the past would yield more return in future compared to other stocks (Wei-qi & Jingxing, 2018). Due to this, investors tend to adopt a momentum strategy in their decision-making process.

The previous article explained the momentum analysis of 303 stocks listed in the Bombay Stock Exchange for the short-term, i.e. 4, 8 and 12 weeks. This article examines the performance of growth, income, and value stocks for 3 and 6 months. The momentum for the stocks is determined by the below-stated formula:

Momentum of stocks
Momentum of stocks

Paired t-test analysis of momentum by assessing the movement of stocks based on the 3 months and 6 months depicts whether the variation in the stock market has created an opportunity for the investors to earn momentum-based profit. For this, the testing of the below stated hypothesis would be done at a 5%, or 10% level of significance.

H01: There is no opportunity of earning momentum profit

HA1: There is an opportunity of earning momentum profit

Medium-term momentum analysis for 3 months

Table 1: Paired t-test for 3 months growth momentum
Table 1: Paired t-test for 3 months growth momentum
Momentum analysis of growth stocks for 3 months

The mean value of holding and formation periods show improvement in the performance of stocks which led to a rise in the closing price and an increase in the momentum value. The standard error value shows that there has not been much change in the momentum effect volatility for the 3 month period. Further, the p-value of 0.16 is greater than the required significance value of 0.05 or 0.10. Thus, the null hypothesis of no opportunity of earning momentum profit is not rejected. Hence, the momentum analysis for the growth stocks depicts that the variation in the stock price improved the performance and return generating opportunity for the stocks but the possibility of having momentum profit was not there for investors.

Momentum analysis of income stocks for 3 months

The mean value of holding and formation periods show an improvement in the performance of stocks. Over a period of 3 months, there has been a rise in the closing price of stocks which resulted in an increment in the momentum effect for the stocks. However, this value is less than the momentum value of the growth stocks. The standard error value shows that variation in the stock prices has increased, but is less than the growth stocks. The P-value for the test is 0.00 which is less than the significance level of 0.05 or 0.10. Thus, the null hypothesis of no opportunity to earn momentum profit is rejected. Hence, the analysis shows that as fluctuations are occurring in the income stock market, the performance of the stock is improving which led to more momentum value. It benefited the investors by providing the opportunity to earn momentum profit.

Momentum analysis of value stocks for 3 months

Mean values of holding and formation periods depict that as there have been fluctuations in the stock market of value stocks, the performance of stocks has improved due to the rise in the closing price value. However, this momentum effect for value stocks is less than growth and income stocks. The standard error value shows that as there has been a reduction in the variability of stocks, the volatility of the market has also reduced. This led to a decrease in the probability of variation in the momentum effect for value stocks. The P-value of stocks is 0.02 which is less than the significance value of 0.05 or 0.10. Thus, the null hypothesis of no opportunity to earn momentum profit is rejected. Hence, the momentum analysis for the value stocks shows that overtime of 3 months, the performance of stocks has improved. It has led to more profit for investors.

Medium-term momentum analysis for 6 months

Momentum analysis of growth stocks for 6 months

Mean values of holding and formation periods show that over the time of 6 months, there has been a rise in the performance of stocks with the increase in the stock price, thus leading to more profit. Standard Error-values depict increased fluctuations of the stock market i.e. there is more volatility present in the growth momentum. Furthermore, the p-value of the test is 0.00 which is less than the required significance value of 0.05 or 0.10. Thus, the null hypothesis of no opportunity to earn momentum profit is rejected. Hence, the analysis shows that over the 6 months period, the performance of growth stocks has improved with the rise in opportunity for the investors to earn benefit from the momentum effect.

Table 4: Paired t-test for 6 months growth momentum
Table 4: Paired t-test for 6 months growth momentum
Momentum analysis of income stocks for 6 months

Mean values of holding and formation periods depict that with the existence of fluctuations, there has been a rise in the performance of the stocks. Momentum value for the income stocks has increased over time, but the probability of momentum effect is less as compared to growth stocks. The standard error shows the variability of income stocks. It explains that the dynamism of the financial market raised the volatility of the market. The P-value of stock is 0.00, i.e. less than the required significance value of 0.05 or 0.10. Therefore the null hypothesis of no opportunity to earn momentum profit is rejected. Hence, the examination of income stocks explains that there has been a rise in the closing price of the stock which led to having improvement in the performance. The existence of increased momentum value created the opportunity for the stocks to derive their benefit.

Momentum analysis of value stocks for 6 months

Mean values of holding and formation period show that momentum value over a period of 6 months led to an increase in the stock price which even created the possibility for the investors to earn a higher return in future. Thus, the rise in momentum effect improves the performance of stocks. Standard error based assessment represents that although dynamism exists in the market and even day-to-day fluctuations bring in a change in stock prices, there has been decreasing in the volatility in the possibility of deriving momentum effect. Furthermore, the p-value of the paired t-test is 0.00 which is less than the significance value of 0.05 or 0.10. Thus, the comparison of holding and formation period depicts that the null hypothesis of no opportunity to earn momentum profit is rejected. Hence, the value stocks over a period of 6 months witnessed the growth in the performance of stocks. Due to the decrease in the volatility of the momentum effect, the opportunity for the investors is available to derive the benefit from momentum profit and earn a better return in future.

Prediction of stock market performance from medium-term momentum effect

The dynamism of the stock market brings in the price variation which influences the performance of stocks. With the purpose of optimal investment, investors tend to examine stocks past performance. Among various other aspects, the cyclical fluctuations enable the investor to earn a better return in future. Being the more growth-oriented stocks and having a high influence of volatility, there has been less opportunity of deriving benefit in the period of 3 months for the growth stocks. But with the increase in the span of time to 6 months, the growth-oriented stocks created the possibility of having better performance and market return earning possibility. Income and value stocks. However, with low to the average risk, they tend to have more chances of earning momentum profit. Thus, although growth, income and value stocks have different market structure, there is the presence of a medium-term momentum effect for each of them.

References

Riya Jain

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