Negative Momentum Profit in Korea and its Sources*

Abstract

To analyze the negative momentum profit in Korea, we further divide the decomposition of Lo and MacKinlay (1990) into winners' and losers' auto-and cross-serial covariances. We find that the negative autocovariance and the positive cross-serial covariance in Lo and MacKinlay's decomposition are asymmetric between winners and losers. The negative autocovariance is mainly from losers and the positive cross-serial covariance mainly between past winners and current losers. By investigating time-series characteristics of auto-(cross-serial) covariances, we cannot observe any systematic change of auto-(crossserial) covariances in the momentum period. Based upon the evidence in this paper, we argue that positive cross-serial covariance between past winners and current losers seems to be an important driving force behind the negative momentum profit in Korea. Therefore, investors' underreaction to market-wide information would be plausible explanation of the negative momentum profit.

Emerging Markets and Financial Resilience

“…Thus, it is hardly surprisingly to find negative returns for our sample period of 2000 to 2011. In any case, the presence of similar 'negative momentum' have been reported in South Korea (Chae & Eom, 2009). The negative returns imply that a contrarian strategy would be profitable rather than a momentum strategy.…”

Physical approach to price momentum and its application to momentum strategy

“…Not only demystification on the origins of the price momentum, pursuit on the profitability and implementability of the momentum effect in financial markets also have been interesting to academia and practitioners. For example, although several studies [28,29,30,31,32] found that the momentum strategies in some Asian markets such as Japanese stock market are not profitable, Asness et al [16] discovered that the momentum strategy in Japan becomes lucrative, when it is combined with other negatively correlated strategies such as value investment. Not limited to several stock markets, the hybrid portfolio of value and momentum also outperforms each of the value and momentum portfolios across the asset classes.…”

Is Money Smart When Funds are Young?

“…The insignificant role of the momentum factor, which may be surprising to US researchers, is rather a reasonable and expected result when considering the historical patterns of Korean stock returns. In contrast to the US market, for which a large body of literature since Jegadeesh and Titman () has established that momentum trading produces robust positive returns, previous studies on the Korean market show that momentum returns are either “negative” or nil (Koh, ; Chae and Eom, ) . For example, Chae and Eom (), who analyzed returns for the period 1980 to 2005, report that momentum returns are −1.45% with statistical significance when momentum portfolios are constructed based on past 1‐month performance, and −0.36% without statistical significance when constructed on past 6‐month performance.…”