The Momentum Effect in the

Korean Stock Market

Hyoungjin Park
Seoul Womens University
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
Literature Review
Overview of the study of momentum
effect
Jegadeesh and Titman (1993)
Past winners on average continue to outperform
past losers over the next three to 12 months.
A zero-cost portfolio generated an excess return of
about 12% per annum between 1965 to 1989.
Rouwenhorst (1997) Europe
Chui, Titman and Wei (2000)except far east
Asian countries.
Griffin, Ji and Martin (2003) the world
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)
Literature Review (3)
Long horizon momentum profits under different
hypotheses
Risk- based Explanation
Conrad and Kaul (1998)
Underreaction
Barberis et. al. (1998)
Overreaction and price correction
DeBondt and Thaler (1985)
Daniel et al. (1998), Hong and Stein (1999)
Empirical Method
Confirmation of the existence of the
momentum effect in the Korean stock
market
Jegadeesh and Titman (1993, 2001)
Examination of causes for the momentum
effect
Regression market states in the pre period
(portfolio formation) and
changes in foreigners ownership
Overreaction and self-attribution
Cooper, Gutirrez, and Hameed (2004)
Chui, Titman, and Wei (2010)
Data
Sample period
From January, 2001 to February, 2007
StockKRX 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.
Momentum portfolio
Portfolio construction
Jegadeesh and Titman (1993, 2001)
Portfolio
Formation
<Pre>
Test
Period
<Post>
Skip
6 months 6 months 1 months
1 Winner
2
3
4
5 Loser
Empirical Results
Month
Cumulative 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
<Cumulative returns of portfolios after formation>
We can observe the momentum effect. Winner and
loser portfolios both increase in value after portfolio
formation, but winner increase faster.
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 10
14
Date
M
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k
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t

V
a
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(
I
n

M
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W
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n
)
Total market value
Total market value of shares owned by foreigners
Empirical Results (3)
The ratio of foreigners ownership for the
whole market increase until the end of 2004,
however, after that time, it seemed to
decrease.
20010101 20030101 20050101 20070228
0.3
0.32
0.34
0.36
0.38
0.4
0.42
Date
R
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f
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s
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v
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m
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Empirical Results (4)
Portfolio
Estimated parameters
Adj. R
2
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

What drives momentum?

2
1 _ 2 _ 3 _ 4 _ cumul kospi pre kospi pre Portfolio pre Market pre
r r r FO FO e
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 ratio
during the post period
Conclusion
Changes in foreigners ownership in the pre-
period (portfolio formation) affect the portfolio
return in the post period of only loser portfolio.
The more volatile market is, the less the
performance of winner portfolio in the post
period.
When the market was down (up) in the pre
period, loser portfolio perform relatively well
(poor)
In the post period, increase of foreigners
ownership in winner portfolios is more
prominent than loser portfolios
Further Study
Observe other investor groups trading
activity or changes in ownership for the pre-
and post- periods.
Make and revise hypotheses to examine
causes of momentum effect and factors
affecting variations in momentum effect.
Investigate whether the effect of foreigners
ownership change on the performance of
loser portfolio comes from the situation
foreigners are allowed to short sale while
individual investors are not.