Momentum trading: How it differs among investor segments

ABSTRACT

This study explores the momentum trading behaviours across different investor segments in the Turkish stock market. The empirical analysis confirms the positive return of the momentum strategy both in absolute terms and relative to the market benchmark, and the results support distinctive trading patterns among different investor segments. Specifically, foreign investors follow momentum trading, while domestic individuals lean towards contrarian trading. Further analysis shows that domestic individual investors exhibit a propensity to sell stocks with unrealised capital gains and to increase holdings of stocks with unrealised capital loss consistent with the disposition effect. Nevertheless, the trading behaviour of domestic individual investors could not be explained solely by the disposition effect. In contrast, foreign investors increase ownership share in stocks with unrealised capital gains but their momentum trading behaviour is confirmed even after controlling for disposition effect. These findings contribute to the broader understanding of investor trading behaviour within an emerging market context and provide valuable insights into the applicability of results from developed markets.

KEYWORDS:

• momentum trading
• foreign investors
• institutional investors
• disposition effect

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 We replicated the results through a more formal analysis, employing the model outlined in Equation 4. This model estimates quarterly returns by considering the past one-quarter return while controlling for the variables outlined in Section 5. The results confirm that past returns predict one-quarter ahead of returns after controlling for other potential determinants of returns. The estimation results are available upon request.

2 The regressions are repeated by winsorizing variables at 1% on both sides of the distribution to control outliers and the results are qualitatively similar.

3 The repeat of regression analysis conditioned on past positive and negative returns indicates that foreign investors tend to exhibit momentum trading behavior on winning stocks, while domestic investors demonstrate a contrarian approach towards winning stocks. These findings are consistent with those presented in Section 6, which investigates the impact of past capital gain. The results are available upon request.

4 The regressions are repeated under different setups for robustness analysis. First, the stock sample is rearranged in a way to exclude specific sectors (financial sector, holdings, and investment trusts) and then include only the constituents of the stock index for the biggest stocks (BIST100)). Second, stocks owning at least 3 consecutive years of data are held in the sample. Third, past return is conditioned on the previous 2, 3, and 4 quarters. Fourth, the empirical analysis is replicated by using Fama MacBeth regression. Finally, the regressions are estimated by excluding the last quarter of the year related to tax loss selling motive of investors to recognize the loss and deduct it from tax payment. The results are qualitatively the same as the main results on the relationship between momentum and ownership change. They are available upon request.

5 Besides cognitive biases, the limited arbitrage argument by Shleifer and Vishny (1997) contributes to explanations of the momentum effect by behavioral finance and suggests that noise traders, mostly individual investors, contribute momentum if individual investors exhibit herding behavior in trading and limit the arbitrage opportunity for informed traders.