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The Momentum Effect in the

Korean Stock Market

Hyoungjin Park

Seoul Womens University

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Goal

Examine the existence of the momentum

effect in the Korean stock market

Investigate what drives the momentum

effect in the Korean stock market and

what intensifies this effect

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Literature Review

Overview of the study of momentumeffectJegadeesh and Titman (1993)

Past winners on average continue to outperformpast losers over the next three to 12 months.

A zero-cost portfolio generated an excess return ofabout 12% per annum between 1965 to 1989.

Rouwenhorst (1997) Europe

Chui, Titman and Wei (2000) except far eastAsian countries.

Griffin, Ji and Martin (2003)the world

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Literature Review (2)

Violation of Weak-Form Market Efficiency

Short-term

Return reversal in 1 week to 1 month (Lehmann,

1990) Intermediate-term

Momentum phenomena for 6-months to one

year(Jegadeesh and Titman, 1993)

Long-term Return reversal in 3 to 5 years (De Bondt and Thaler,

1985)

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Literature Review (3)

Long horizon momentum profits under differenthypotheses

Risk- based Explanation

Conrad and Kaul (1998)

UnderreactionBarberis et. al. (1998)

Overreaction and price correction

DeBondt and Thaler (1985)

Daniel et al. (1998), Hong and Stein (1999)

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Empirical Method

Confirmation of the existence of themomentum effect in the Korean stockmarket Jegadeesh and Titman (1993, 2001)

Examination of causes for the momentumeffect Regression market states in the pre period

(portfolio formation) andchanges in foreigners ownership

Overreaction and self-attribution

Cooper, Gutirrez, and Hameed (2004)

Chui, Titman, and Wei (2010)

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Data

Sample period

From January, 2001 to February, 2007

Stock KRX and FnGuide

All stocks traded in KRX

Screening criteria

Stocks with a price of 500 won per share

Firms with market value less than bottom 10%

During the formation and test, if a firm does stock-

split or stock-split reverse, this company is

excluded.

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Momentum portfolio

Portfolio construction

Jegadeesh and Titman (1993, 2001)

Portfolio

Formation

Test

PeriodSkip

6 months 6 months1 months

1 Winner

2

3

4

5 Loser

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Empirical Results

MonthCumulative returns

Winner Loser Winner-Loser p-value

1 0.007 0.005 0.002 0.661

2 0.031 0.019 0.012 0.126

3 0.055 0.039 0.016 0.089

4 0.082 0.059 0.023 0.026

5 0.110 0.080 0.029 0.006

6 0.133 0.099 0.034 0.002

We can observe the momentum effect. Winner and

loser portfolios both increase in value after portfolio

formation, but winner increase faster.

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Empirical Results (2)

Market value Increase, especially after 2005

Foreigners holding Increase, but before 2005 the increase is more

apparent.

20010101 20030101 20050101 20070228

1

2

3

4

5

6

x 1014

Date

M

arketValue(InMillionWon)

Total market valueTotal market value of shares owned by foreigners

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Empirical Results (3)

The ratio of foreigners ownership for thewhole market increase until the end of 2004,however, after that time, it seemed todecrease.

20010101 20030101 20050101 20070228

0.3

0.32

0.34

0.36

0.38

0.4

0.42

Date

Ratioofforeign

ownedstockvaluetomarketvalue

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Empirical Results (4)

PortfolioEstimated parameters

Adj. R2

Winner 0.146

(2.142)

-0.101

(-0.563)

-1.759

(-3.207)

-0.002

(-0.001)

0.048

(0.025) 0.276

Loser 0.108(3.683)

-0.312(-1.917)

-0.339(-0.649)

18.664(2.878)

-0.982(-0.899)

0.277

1 2 3 4

What drives momentum?

2

1 _ 2 _ 3 _ 4 _ cumul kospi pre kospi pre Portfolio pre Market prer r r FO FO e

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Empirical Results (5)

Portfolio A passed time after portfolio formation (month)1 2 3 4 5 6

Winner 0.006

(0.000)

0.008

(0.000)

0.011

(0.000)

0.013

(0.000)

0.016

(0.000)

0.018

(0.000)

Loser 0.000

(0.189)

0.001

(0.024)

0.001

(0.045)

0.001

(0.018)

0.002

(0.009)

0.002

(0.025)

Changes in foreigners ownership ratioduring the post period

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Conclusion

Changes in foreigners ownership in the pre-period (portfolio formation) affect the portfolioreturn in the post period of only loser portfolio.

The more volatile market is, the less the

performance of winner portfolio in the postperiod.

When the market was down (up) in the preperiod, loser portfolio perform relatively well

(poor) In the post period, increase of foreigners

ownership in winner portfolios is moreprominent than loser portfolios

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Further Study

Observe other investor groups tradingactivity or changes in ownership for the pre-and post- periods.

Make and revise hypotheses to examinecauses of momentum effect and factorsaffecting variations in momentum effect.

Investigate whether the effect of foreigners

ownership change on the performance ofloser portfolio comes from the situationforeigners are allowed to short sale whileindividual investors are not.