The Effect of Global Crises on Momentum Profitability: Evidence from the Indian Stock Market

Abstract

There is a plethora of research that suggests profitability of momentum strategies in international stock markets. The current study adds to the existing literature by exploring the same in the Indian stock market over the more recent years. In addition, the study aims to test whether the momentum strategy performs persistently and remains consistent even during financial crises periods, emphasizing on the recent global meltdown of 2008. Eight momentum strategies were investigated with different combinations of formation and holding period and the study adds convincing evidence in favour of Indian momentum profitability. Statistically as well as economically significant momentum returns were observed that remained statistically significant even after risk adjustment. However, the financial crisis induced significant changes in the Indian momentum profitability. The momentum returns were observed to be positively high during pre-crisis period that turn negative during crisis period and again reverse to generate high momentum returns during the post-crisis period. The evidence indicates non-stability of momentum profits wherein momentum strategies crash during the financial crises periods.