In this paper, we examine the possibility of price momentum strategy and the profitability thereof in the Indian equity market, which is one of the most promising emerging markets. We also analyze the magnitude of contribution made by losers’ and winners’ portfolios to momentum profit in the Indian context. The results show a strong presence of momentum phenomenon in the Indian context and also winners’ portfolio contributes more to momentum return.

Price momentum is a robust pricing anomaly in security returns and it comprises simple trading strategies based on historical stock return. Momentum implies stocks that perform the best (worst) over a three-month to one year period, tend to continue like same during the subsequent three-month to one year period (Jegadeesh and Titman, 1993). Price momentum refers to the strategy that buys past winners and sells past losers, which results in earning abnormal returns for a period of up to one year (medium-term horizon) after the execution of the strategy. Price momentum is regarded as a direct repudiation of weak form of Efficient Market Hypothesis (EMH). Momentum trading strategies seek to exploit the momentum effect. Studies conducted in both developed and emerging markets reveal that momentum investment strategy based on historical price information provides excess return or abnormal return (otherwise called momentum return) to investors.

This intermediate horizon price continuation (momentum effect) was first noted by Jegadeesh and Titman (1993). After which, a fundamental question in finance cropped up as to whether a firm’s past stock performance really affects future stock returns. Researchers investigated the truth behind momentum hypothesis and documented several risk-based and behavioral-based explanations. Apart from academic researchers, momentum investment strategy attracts the attention of the world of professional asset management. Fund managers in the USA adapted momentum strategies and found success of this pricing anomaly. Grinblatt et al. (1995) found that 77% of the US mutual fund companies were momentum investors and these mutual funds were performing better than the other mutual funds. Further, Chen et al. (2000) reported that mutual funds normally follow the trading strategy of buying past winners’ stocks and selling their counterparts. In the US equity markets, fund managers launched momentum-based fund schemes named as ‘Momo Fund’ and emerged successful, resulting in billions of dollars of assets under their management.

Applied Finance Journal, Price Momentum, Efficient Market Hypothesis (EMH), Capital Asset Pricing Model (CAPM), Fama and French (FF), Strategies, Evidences, Indian Equity Market.