Decomposition of Cross-Sectional Momentum and Contrarial Strategy Returns: Behavior or Rational Explanation on Russia Capital Market
Our research is devoted to trade strategy’s profits and study of financial anomalies in stocks pricing. We analyze Momentum (and Reversal) strategies construction that is based on historical prices of assets. The main feature of the momentum strategy
is that past stocks relative return (higher or lower than mean return or benchmark set) is used for selecting assets in portfolio.
The accent in our paper is made on revealing the nature of momentum and reversal (or contrarian) effects over time periods up to one year through the analysis of two basic determinants of abnormal profits of arbitrage portfolios of different design:
cross-sectional variance of mean returns (rational explanation) and time-series predictability of asset returns (irrational explanation according EMH). The analyzed period embraces, from January 2006 to December 2014. Our research of Russian
stock market has shown that, considering the choice of portfolio design (temporal windows for selecting stocks for portfolio and investment, and weight of stocks in the portfolio) and stock sample for constructing strategies (the sample should include
major companies with liquid stocks) momentum and reversal effects do take place. Momentum profit is demonstrated in short-term strategies (3 to 6 months), while reversal effect is marked for ultra-short (less than a month) and long periods
(11–12 months). Profit decomposition shows that the component responsible for rational explanations is statistically significant and its weight prevails in most momentum strategies with investment period not exceeding 9 months.