Short term momentum analysis of growth, income and value stocks

By Riya Jain and Priya Chetty on February 9, 2021

Stock market prediction is essential for making sound decisions regarding financial investments. However, the information pertaining to stocks is uncertain, incomplete, vague, and challenging. It also requires meticulous analysis of the stock data. Short term momentum analysis represents the change experienced by stock prices over a specified period of time. The examination of recent past performance represents the status of the short term investments (Agrawal et al., 2010). This article examines the short-term performance of the stocks by comparing the stock prices for the formation and holding period via paired t-test. The holding period is defined as the current value of stocks while the formation period is the stock price n-days ago.

Herein, the momentum for the stocks is computed by using the given formula.

Computation of momentum of stocks
Computation of short term momentum analysis of stocks

The analysis describes whether the respective period has created an earning opportunity for the investor due to short-term momentum effect. For this below-stated hypothesis is tested at 5% or 10% level of significance for 4 weeks, 8 weeks, and 12 weeks.

H01: There is no opportunity of earning momentum profit

HA1: There is an opportunity of earning momentum profit

Short term momentum analysis for 4 weeks

The table below represents the momentum-based examination of income, growth and value stocks for the span of 4 weeks.

Table 1: Paired t-test for 4 weeks growth momentum
Table 1: Paired t-test for 4 weeks growth momentum

Analysis of growth stocks (4 weeks)

The mean value for holding period and for the formation period depict that there has been a slight increase in the momentum of stocks compared to the value of stocks 4 weeks back showing the rise in performance of growth stocks. Therefore, due to dynamism in the stock market, there has been a slight increase in the volatility of the market. T-test for the growth stocks further reveals that with a value of 0.63, a p-value of the paired t-test is greater than the significance value of 0.05 or 0.10. Thus, the null hypothesis of no opportunity of earning momentum profit in case of growth stocks is not rejected. Hence, for the momentum of 4 weeks, no short effect was present in case of growth stocks for yielding more profit-earning opportunity.

Analysis of income stocks (4 weeks)

Mean value for the holding and formation periods show that the stock momentum has increased in comparison to the 4 weeks back value depicting that stocks performance has improved but is less than growth stocks. The standard error values show that due to the dynamism of the stock market, the volatility in the stock closing price has slightly increased. However, the volatility in the market of income stocks is still less than the growth stocks. P-value of 0.55 is greater than 0.05 or 0.10. Thus, the null hypothesis of no opportunity of earning momentum profit is not rejected. Hence, though the performance of income stocks has increased in the span of 4 weeks with a slight rise in momentum value but the investors were not able to earn any profit due to this short momentum.

Analysis of value stocks (4 weeks)

The mean value of the holding and formation period shows that over the time of 4 weeks, there has been a slight rise in the momentum mean value. Though there has been increasing in the value but compared to income and growth stocks, the mean value of the momentum effect is still showing less momentum in the value stocks. Standard error values show that with the passage of time, there has been a reduction in the volatility of the market. Even this variation in the value stocks is less than the growth and income stocks.

Lastly, the p-value is 0.30 which is greater than the required significance value of 0.05 or 0.10. Thus, the null hypothesis of no opportunity to earn momentum profit is not rejected. Hence, although value stocks witness a rise in the momentum effect value for the period of 4 weeks, the effect is not so large that investors could earn momentum profit from it.

Short term momentum analysis for 8 weeks

The table below represents the momentum-based examination of the stocks for a span of 8 weeks.

Table 2: Paired t-test for 8 weeks growth momentum
Table 2: Paired t-test for 8 weeks growth momentum

Analysis of growth stocks (8 weeks)

The mean value of the holding and formation period shows an improvement in the performance of stocks over a period of 8 weeks. P-value of 0.40 is greater than the required significance level of 0.05 or 0.10. Thus, the null hypothesis of no opportunity to earn from momentum profit is not rejected. Hence, the growth stocks have witnessed improvement in the momentum value and even variability of the market was constant over a span of 8 weeks but still, the momentum profit opportunity was not there.

Analysis of income stocks (8 weeks)

Mean value of holding and formation period depicted that income stocks have seen improvement in the performance of their stocks due to the momentum effect. However, as the momentum average value of income stocks is less than growth stocks and even the rise in value is less, thus income stocks have comparatively less possibility of earning momentum profit. The P-value for the paired t-test is 0.02 which is less than 0.05 and 0.10. Thus, the null hypothesis is rejected.

Hence, the analysis suggests that with the presence of variation in the market, the investors of income stocks had the opportunity to utilize the market volatility and earn momentum profit.

Analysis of value stocks (8 weeks)

Mean value for holding and formation period when compared to the growth and income stocks is less and even the rise in performance is less. Thus, there are fewer chances of earning momentum profit. The P-value for the paired t-test is 0.07 which is less than 0.10. Thus, the null hypothesis of no opportunity to earn momentum profit is rejected at 10% level of significance.

Hence, the value stocks depict that over the period of 8 weeks, there has been an improvement in the performance of stocks and even with the reduction of the volatility of the market, the investors of value stocks are able to earn momentum profit.

Short term momentum analysis for 12 weeks

The table below represents the momentum-based examination of the stocks for a span of 12 weeks.

Table 3: Paired t-test for 12 weeks
Table 3: Paired t-test for 12 weeks

Analysis of growth stocks (12 weeks)

The mean value of holding and formation period shows an increase in momentum value. The standard error shows that the stocks have not witnessed much impact of volatility in their prices. Furthermore, the p-value is 0.19 which is greater than the required significance value of 0.05 or 0.10. Thus, the null hypothesis of no opportunity to earn momentum profit in case of growth stocks is not rejected.

Hence, though the performance for the stocks has improved, the investors of the growth stocks were not able to derive the benefit of 12 weeks momentum depicting the absence of momentum profit earning opportunity.

Analysis of income stocks (12 weeks)

Mean values show an improvement in the performance of stocks which lead to a raise at the stocks prices. However, in comparison to the growth stocks, the value has reduced and even the magnitude of increase in mean value was less. Standard error value shows that the dynamism of the income stocks led to rising in the volatility, but less than growth stocks.

Furthermore, the p-value is 0.00 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 income stocks have witnessed improvement in their performance wherein, the investors have the opportunity of earning momentum profit due to the more variability in the span of 12 weeks.

Short term momentum analysis of value stocks (12 weeks)

Mean values show an improvement in the performance of stocks over the time of 12 weeks and investors of value stocks were able to earn more. In comparison to the growth and income stocks, however, the value is less. The standard error value for value stocks is less than the growth and income stocks value depicting that there is less variability present in the value stock market. Lastly, the p-value of 0.02 which is less than the significance value of 0.05 or 0.10.

Thus, the null hypothesis of having no opportunity to earn momentum profit is rejected. Hence, the analysis depicts that with a span of 12 weeks, the performance of value stocks have improved and due to a reduction in the volatility of the market, value stock investors earned more profit.

Momentum profit, an opportunity of earning for the investors

Momentum profit defines the variation in the stock prices, indicating the opportunity of earning a profit. Observation of stocks’ performance for 4 weeks, 8 weeks and 12 weeks shows an improvement and growth in the volatility of growth and income stocks over time. However, for the very short period i.e. 4 weeks, there was not much change in the stocks and even investors were not able to derive the benefit of variation. However, being less risky instruments income and value stocks for the 8 weeks and 12 weeks period created the possibility of earning momentum profit and even witnessed less variability in comparison to growth stocks. Thus, with the low momentum value, the financial market provided the opportunity for investors and short term movements benefited the investors of income and value stocks.

References

  • Agrawal, S., Jindal, M., & Pilla, G. N. (2010). Momentum analysis based stock market prediction using Adaptive Neuro-Fuzzy Inference System (ANFIS). Proceedings of the International MultiConference of Engineers and Computer Scientists 2010, IMECS 2010, March 2010, 526–531.
  • Ejaz, A., & Polak, P. (2013). The origin of short-term momentum effects’ profits. Investment Management and Financial Innovations, 10(3), 8–18.
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