Investigating the Momentum Effect in the Merging Market: Evidence from Pakistan

Abstract

The momentum effect has been extensively studied in previous studies. However, this topic has received scarce attention in Pakistan’s stock market. We investigate the influence of momentum strategies on the stock returns by utilizing the capital assets pricing model (CAPM), Carhart four-factor model, 25 momentum strategies and by employing 466 firms’ data from Pakistan stock markets over the period from 2009 to 2017. The results suggest the inexistence of momentum effects in the Pakistan Stock Exchange. The CAPM can explain the momentum profit of 6/1 and 9/1 strategies. The results of the Carhart four-factor model reveals a positive and significant relationship between portfolios’ return and market and value premium. Conversely, there is a negative and significant relationship between portfolios’ return and size and momentum factor. For momentum strategies, 3 out of 25 zero-cost portfolios are positive and statistically significant, confirming a momentum effect. However, with 6 and 9 months of formation period and 1 month of the holding period (6/1; 9/1), the portfolios generate a significantly high return. This study contributes new knowledge to the momentum literature, providing new perspectives to understand the momentum effect in an emerging market like Pakistan.