The impact of oil price and exchange rate on momentum strategy profits in stock market: evidence from oil-rich developin
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The impact of oil price and exchange rate on momentum strategy profits in stock market: evidence from oil‑rich developing countries Mehdi Zolfaghari1 · Bahram Sahabi1 Received: 25 March 2020 / Accepted: 28 August 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract The existing literature is still inconclusive on whether momentum exists and whether momentum strategy profits are affected by macroeconomic variables. The aim of the present study is two-fold. First, we examined the existence of the momentum by studying the strategy profits in six oil-rich developing countries in Middle East including Iran, Saudi Arabia, Bahrain, Qatar, the United Arab Emirates, and Kuwait using the double-sort strategies. Our findings show that there is a momentum profit over short-, mid- and long-term periods in all countries. After selecting the best combinations of information sets and holding lengths for each country, by adding the oil price and the exchange rate, and adjusting the models proposed by Chordia and Shivakumar (J Finance 57:985–1019, 2002) and Kim et al. (J Bank Finance 49:191–215, 2014) on the characteristics of oil-rich developing countries, we estimated the impact of macroeconomic variables on the expected momentum profits through a two-state Markov regime switching model under different distributions. The findings indicate that the momentum strategy profits can be explained by a set of lagged macroeconomic variables, especially oil prices and exchange rate. The results show that the winner portfolio has a greater sensitivity to macroeconomic variables than does the loser portfolio in both the expansion and recession states. It is also indicated that both the winner and the loser stocks are riskier in the expansion periods than recession periods. The results indicate that the returns on momentum portfolios react asymmetrically to economic conditions in the recession and expansion states. Keywords Momentum · Markov switching · Oil price · Macroeconomic variables Mathematics Subject Classification 91G10 · 91G70 · 91B64 * Mehdi Zolfaghari [email protected] Bahram Sahabi [email protected] 1
Faculty of Management and Economics, Tarbiat Modares University, Tehran, Iran
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1 Introduction During the last three decades, empirical researches made evident that returns in stock markets are not explained by beta alone, in contrast to the CAPM. Basu (1983) found the value effect, Banz (1981), and Roll (1981) discovered the size effect. Fama and French (1993–1998) offered cross-sectional explanations of returns by taking the specially designed portfolio SMB1 and HML2 as additional factors. In recent years there has been growing interest over the predictability of future prices of securities and the adoption of investment strategies in accordance with abnormal returns which led to introduce momentum strategy (Scheurle and Spremann 2010). Momentum trading is one such investment strategy which is based on the examination of historical secur
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