Dissecting sources of price momentum: evidence from India

Purpose – Momentum is an unresolved puzzle for the financial economists. The purpose of this paper is to dissect the sources of momentum profits and investigate the possible role played by the macro-economic variables in explaining them. Design/methodology/approach – The data for 493 companies that form part of Bombay Stock Exchange 500 index in India is used for calculating 6-6 momentum profits. Profits from the strategy are regressed on Capital Asset Pricing Model (CAPM) and Fama-French (FF) model to see whether they can explain these profits. Guided by prior research, three methodologies are used to see the possible role played by macro-economic variables in explaining momentum payoffs. Findings – The empirical results show that momentum profits are persistent in the intermediate horizon. CAPM and FF three-factor model fail to explain these returns. Price momentum seems to be explained in one of the model by lagged macro-economic variables which lend an economic foundation to the Carhart factor. The “Winner minus Loser” factor explains about 37 percent of abnormal returns on the winner portfolio that are missed by the FF model. The unexplained momentum profits seem to be an outcome of investors’ over-reaction to past information. Hence, the sources of price momentum profits seem to be partially behavioral and partially rational. Practical implications – The failure of risk models in fully explaining the momentum profits may be good news for portfolio managers who are looking out for stock market arbitrage opportunities. Originality/value – This paper fulfills an identified need to study the sources behind price momentum profits in Indian context.