Luận văn thạc sĩ UEH whether momentum or contrarian phenomenon exist in vietnam stock market

MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

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TA THU TIN

WHETHER MOMENTUM OR

CONTRARIAN PHENOMENON EXIST IN

VIETNAM STOCK MARKET

MAJOR: FINANCE – BANKING

MAJOR CODE: 60.31.12

MASTER THESIS

ADVISOR: Ph.D. TRAN PHUONG NGOC THAO

HO CHI MINH CITY, 2011

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ACKNOWLEDGEMENT

At first, I would like to express my deep gratitude to my instructor, Dr. Tran Phuong

Ngoc Thao for her intensive guidance and valuable suggestions during time of my study.

I would like to thank Dr. Vo Xuan Vinh for valuable comments and suggestions he share

with me. In addition, I also give my appreciation to all of my lecturers at Faculty of

Banking and Finance, University of Economics Hochiminh City for their teaching and

knowledge during my master course.

My sincere thank goes to Nguyen Hiep Phat, my colleague at Au Viet Securities, he spent

a lot of time to help me make a software program to process raw data in this thesis.

Finally, I am thankful to my family for giving me facilitation to complete my thesis.

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ABSTRACT

This thesis investigates whether momentum or contrarian phenomenon exist on

Vietnamese Stock Market over the period from January 2005 to June 2011. We employ

the famous methodology by Jegadeesh and Titman (1993) to calculate the profit of

momentum and contrarian strategies which were built base on the historical return of 424

stocks listed on Ho Chi Minh Stock Exchange and Ha Noi Stock Exchange.

We found that all 16 trading contrarian strategies always make abnormal profit with

statistical significance at the level of 10% . The most profitable contrarian strategy with

portfolio based on 6 month formation and 3 month holding has a average monthly return

of 2,829% (equivalent to annually return of 33,95%) with significance level of 2%.

Our research demonstrates that the abnormal profit on trading contrarian strategy can not

be accounted for by beta-risk as well as market size. But we found a evidence of P/B ratio

explaining contrarian phenomenon on Vietnamese Stock Market.

Key words: Momentum; Contrarian strategies.

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iii

TABLE OF CONTENTS

ACKNOWLEDGEMENT……………………………………………………………… i

ABSTRACT…………………………………………………………………………….. ii

TABLE OF CONTENTS……………………………………………………………… iii

LIST OF FIGURES……………………………………………………………………. vi

LIST OF TABLES…………………………………………………………………….. vii

ABBREVIATIONS…………………………………………………………………… viii

1. Introduction…………………………………………………………………………. 1

1.1. Overview of Momentum and Contrarian strategies……………………………... 1

1.2. Research Objective……………………………………………………………… 2

1.3. Research Methodology and Scope………………………………………………. 3

1.4. Thesis Structure…………………………………………………………………. 4

1.5. Vietnamese Stock Market……………………………………………………….. 5

2. Literature Review…………………………………………………………………... 7

2.1. Efficient Market Hypothesis……………………………………………………. 7

2.2. Momentum Strategy…………………………………………………………….. 8

2.3. Contrarian Strategy…………………………………………………………….. 15

3. Data Collection and Research Method…………………………………………... 18

3.1. Data Collection………………………………………………………………… 18

3.1.1. Stock Prices…………………………………….……………………….. 18

3.1.2. Adjusted Stock Prices………………………………………………….. 19

3.1.3. P/B ratio………………………………………………………………… 21

3.1.4. Market Capitalization…………………………………………………… 22

3.2. Research Method………………………………………………………………. 22

4. Empirical Result…………………………………………………………………… 24

4.1. Raw Data Processing…………………………………………………………... 24

4.2. Empirical Result……………………………………………………………….. 28

4.3. Why does the contrarian phenomenon exist in Vietnam stock market?.............. 32

4.4. Some factors may account for the contrarian phenomenon in Vietnam Stock

Market…………………………………………………………………………... 35

4.4.1. Market Risk…………………………………………………………….. 36

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4.4.2. Firm Size………………………………………………………………... 39

4.4.3. Price to Book……………………………………………………………. 40

5. Conclusion…………………………………………………………………………. 42

5.1. Main findings…………………………………………………………………... 42

5.2. Implications of Research………………………………………………………. 43

5.3. Limitations of Research……………………………………………………….. 44

REFERCENCES……………………………………………………………………… 45

APPENDIX…………………………………………………………………………… 48

Table A1: List of 424 investigated stocks……………………………………………………48

Table B1-Table B16: The average monthly return of Winner and Loser

Portfolios in 16 strategies…………………………………………………………………….. 59

Table C1-Table C16: The average monthly return of Loser portfolio

compare to the one of Winner portfolio in 16 strategies…………………………………. 75

Table D11: Estimation of Beta of Winner portfolio in J=3/K=3 strategy……………… 83

Table D12: Estimation of Beta of Loser portfolio in J=3/K=3 strategy……………….. 84

Table D21: Estimation of Beta of Winner portfolio in J=6/K=3 strategy……………… 85

Table D22: Estimation of Beta of Loser portfolio in J=6/K=3 strategy……….………..86

Table D31: Estimation of Beta of Winner portfolio in J=9/K=3 strategy……………….87

Table D32: Estimation of Beta of Loser portfolio in J=9/K=3 strategy…………………88

Table D41: Estimation of Beta of Winner portfolio in J=12/K=3 strategy……………. 89

Table D42: Estimation of Beta of Loser portfolio in J=12/K=3 strategy……………….90

Table E1: Average Market Capitalisation of Loser portfolio compare to Market

Capitalisation of Winner portfolio in J=3/K=3 strategy…………………………………..91

Table E2: Average Market Capitalisation of Loser portfolio compare to Market

Capitalisation of Winner portfolio in J=6/K=3 strategy…………………………………..91

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Table E3: Average Market Capitalisation of Loser portfolio compare to Market

Capitalisation of Winner portfolio in J=9/K=3 strategy…………………………………. 92

Table E4: Average Market Capitalisation of Loser portfolio compare to Market

Capitalisation of Winner portfolio in J=12/K=3 strategy………………………………...92

Table F1: The average P/B ratio of Loser portfolio compare to

the average P/B ratio of Winner portfolio in J=3/K=3 strategy………………………..93

Table F2: The average P/B ratio of Loser portfolio compare to

the average P/B ratio of Winner portfolio in J=6/K=3 strategy……………………….. 93

Table F3: The average P/B ratio of Loser portfolio compare to

the average P/B ratio of Winner portfolio in J=9/K=3 strategy……………………….94

Table F4: The average P/B ratio of Loser portfolio compare to

the average P/B ratio of Winner portfolio in J=12/K=3 strategy……………………...94

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vi

LIST OF FIGURES

Figure 1.1. VN-Index Chart over the period from July 2000 to September 2011………….6

Figure 3.1. Formation and Holding periods in two strategies……………………………..23

Figure 4.1. The screen of the Analyzing Stock Price Data program

after importing data from Excel file…………………………………………………………….25

Figure 4.2. The screen of the Analyzing Stock Price Data after stocks are

ranked in descending order on the basis of their average monthly returns……………...26

Figure 4.3: The screen of Stock Grouping program shows the Winner

and Loser portfolios, and their average returns……………………………………………..27

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vii

LIST OF TABLES

Table 3.1. Adjusting price of KDC share………………………………………………….…..20

Table 3.2. Adjusting price of OPC share………………………………………………….…..21

Table 4.1. The average return of Winner and Loser Portfolios and their difference in

J=3/K=3 Strategy (Formation Period: 3 months; Holding Period: 3 months)……..……28

Table 4.2. Summary of the average monthly return of loser and winner portfolio;

and their differences (profitability of contrarian strategies) for 16 strategies

over the period from 01/2005 to 06/2011……………………………………………….…....30

Table 4.3. Monthly and annually profitability of 16 contrarian strategies

are ranking in descending and their significances………………………………………....31

Table 4.4. Beta coefficient after perform regression………………………………………...38

Table 4.5. The comparison in average market capitalization between

loser and winner portfolios and their differences……………………………………….......39

Table 4.6. The comparison in average P/B ratio between loser and winner portfolios…41

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viii

ABBREVIATIONS

CAPM Capital Asset Pricing Model

EMH Efficient Market Hypothesis

HOSE Ho Chi Minh City Stock Exchange

HNX Ha Noi Stock Exchange

VND Vietnam Dong

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1

CHAPTER 1: INTRODUCTION

1.1 Overview of Momentum and Contrarian Strategies

In 1970, Efficient Market Hypothesis (EMH) developed by Professor Eugene Fama

proclaimed that in the efficient market no one could consistently beat the market and

stock prices follow a random walk. Thus, future prices of stocks could not be predicted

from their past prices, it means that the abnormal return from trading should be zero.

However, a lot of investors and researchers have doubts about the efficient market

hypothesis both empirically and theoretically. They always try to find some abnormal

returns to prove the inefficiency of the markets.

Consequently, forecasting the price movements in stock markets has become a major

challenge for investors, brokers and speculators. Studying the movement of stock prices

become one of the most attractive fields of research due to its commercial applications

and benefits it offers. Recently, there are many researchers and traders have studied

stock price predictions such as Fundamental Analysis, Technical Analysis, CANSLIM,

etc…

And one of the most attractive trading strategies is momentum (and contrarian) strategy.

The momentum strategy appeared firstly in the 1960s. However, it became widely known

only in the early 1990s after Narasimham Narasimhan Jegadeesh and Sheridan Titman

published their study. Momentum and contrarian strategies are two opposite investment

strategies which use historical price/return data in order to forecast the future

development of stock performance to make excess returns. Momentum investing strategy,

also sometimes known as “Trend following”, believes that stocks which have good

performance in the past will keep doing so in the future, it buys (go long) stocks that have

outperformed in the recent past, and short sell (go short) those that have underperformed

over the same period. In contrast, a contrarian strategy believes that stocks which have

good historical performance will be bad in the future, so it suggests short selling past

winning stocks and buying past losing stock. The contrarian strategy was introduced first

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