Purpose – The purpose of this paper is to examine the profitability of return-based investment strategies in the New Zealand stock market; 16 such strategies are examined for the period from January 1995 to December 2004. Design/methodology/approach – The paper shows that, at the end of each month of the sample period, every security is ranked in ascending order using their past J-month formation period cumulative return (J=3, 6, 9 and 12). Then these securities are allocated to three groups; group 1 represents the loser portfolio, while group 3 represents the winner portfolio. Finally, equally weighted average returns of winner and loser portfolios are calculated over the next K-month holding period (K=3, 6, 9, and 12). The statistical significance of the returns earned from buying winners and shorting losers is tested in order to determine the profitability of proposed strategies. Findings – The findings in this paper show that a strong momentum effect, rather than a reversal effect, is present in this market. For example, the strategy, which is based on a six-month portfolio formation period and a six-month holding period, generates a monthly return of 1.14 per cent. These strategies are most profitable when they are based on formation and holding periods of three-to-six months. Further analyses reveal that the profits generated by such investment strategies cannot be explained by either the small firm effect or the January effect. Originality/value – The main implication of this paper shows that buying past winners and selling past losers is profitable in the short to medium run in New Zealand.
- New Zealand
- Stock markets