Exploring the Existence of Momentum Reversal Pattern in Pakistani Equity Market

Abstract

This paper examines the presence of momentum reversal anomaly by
applying both parametric and non-parametric approaches. The paper
also aims to explore which momentum strategy is beneficial in case of the
Pakistani equity market. For this purpose, the stochastic dominance
approach is applied. In order to test the momentum reversal anomaly, we
construct winner and loser portfolios by using 36-month holding period
returns and apply the KS test of Barrett and Donald (2003). We also apply
the t-test to test whether the difference between the mean return of loser
and winner portfolios is statistically greater than zero. We find that the
loser portfolio is stochastically dominates over the winner portfolio at all
the three examined SD orders. Both the KS test and the t-test show that
the loser portfolio dominates over the winner portfolio in all 36-month
test periods. On average, loser stocks earn 39.8% excess returns as
compared to winner stocks. These findings might have useful implications
for trading strategies and investment decisions. The results of this paper
help enhance our understanding of stock return anomalies in equity
markets. The results also suggest that investors in Pakistan can get
market-adjusted excess returns by making their investments based on the
contrarian strategy.