Momentum on the JSE: the influence of size and liquidity

Abstract

This study investigates the buy-and-hold returns to intermediate-term ‘zero investment’ momentum strategies on the Johannesburg Stock Exchange, using both equally-weighted and value-weighted portfolios. The results indicate that there is little evidence to support the prevalence of intermediate-term ‘pure’ price momentum in South Africa using ‘zero investment’ strategies. Furthermore, this study examines the influence of size and liquidity on momentum returns. Compared to ‘pure’ price ‘zero investment’ momentum strategies, this study finds stronger return continuation for ‘zero investment’ strategies among medium and large capitalisation stocks, as well as the most liquid stocks. Moreover, a detailed analysis into the loser and winner portfolios that constitute the ‘zero investment’ portfolio, reveals that, if one is open to abandoning the traditional ‘zero investment’ approach, the returns to size-sorted momentum strategies may be significantly enhanced by taking a long position in the small-size winner portfolio, and the returns to liquidity-sorted momentum strategies can likewise be enhanced by taking a long position in the high-volume winner portfolio.