An Analysis of momentum and mean reversion effects on equity indices

Özbilge, Armağan
Momentum and mean-reversion effects have become very popular in finance literature for the last two decades since their presence can generate abnormal profit patterns by applying either relative strength or contrarian trading strategy accordingly. Even though there are some common factor explanations for return reversals, they might not provide the full picture for return persistence. In our theoretical framework, we analyse some of the well-known discrete time momentum studies including the initial one and try to explain why a novel approach is needed. Henceforth, in this work, we focus on a continuous time model that aims to capture both momentum and contrarian effects in stock returns. Our model nests the standard stochastic framework proposed by Koijen, Rodriguez and Sbuelz (2009). In our empirical analysis, we examine the term structure of return continuation (momentum) and mean reversion in Turkish stock market (BIST-100) using historical observation from 2004 to 2014. Further, the results of BIST-index are compared to both previous studies on it and other benchmark results in the literature in which US CRSP-index returns are investigated. Accordingly, we observe that, unlike US, Turkish stock market contains mean reversion, but not momentum effect, as Bildik and Gülay (2007) states by analysing dozens of possible portfolio strategies. Thus, rather than constructing specified portfolios (decile, industry, size, etc.), presence of momentum and mean reversion effects in a stock market might be anticipated accurately by only analysing equity index of that market.


An Investigation on the nature of the idiosyncratic risk of stock portfolios
Kocaarslan, Barış; Soytaş, Uğur; Department of Business Administration (2018)
In this study, based on sound economic theories, two economic transmission channels are identified to investigate the impacts of changes in funding liquidity conditions in interbank loan markets and the reserve currency (US dollar) value on the idiosyncratic portfolio-level risks. Controlling for business cycles, we find that a deterioration in funding liquidity conditions increases the idiosyncratic risk of high-risk portfolios more than that of less risky portfolios. This increase is stronger when the idi...
Modeling co-movements among financial markets: applications of multivariate autoregressive conditional heteroscedasticity with smooth transitions in conditional correlations
Öztek, Mehmet Fatih; Öcal, Nadir; Department of Economics (2013)
The main purpose of this thesis is to assess the potential of emerging stock markets and commodity markets in attracting the attention of international investors who utilize various portfolio diversification strategies to reduce the cumulative risk of their portfolio. A successful portfolio diversification strategy requires low correlation among financial markets. However, it is now well documented that the correlations among financial markets in developed countries are very high and hence the benefits of i...
An Empirical model of the international cost of equity
Uzunkaya, Mehmet; Küçükkaya, Halit Engin; Department of Business Administration (2015)
The aim of the study is to propose an empirical model of the international cost of equity by investigating and analyzing the long-run relation between disaggregated country risk ratings and country stock market index returns for a large panel of countries. The study tests the hypothesis that, given the available theoretical and empirical evidence, country risk ratings and country stock market index returns should move together in the long-run and there should be a long-run equilibrium between them; thus cou...
Using ultra high frequency data in integrated variance estimation: gathering evidence on market microstructure noise
Kılıçkaya, İnci; Danışoğlu, Seza; Department of Financial Mathematics (2017)
In recent years, as a result of more readily available ultra high frequency data (UHFD), realized volatility (RV) measures became popular in the finance literature since in theory, sampling at İncreasingly higher frequency should lead to, in the limit, a consistent estimator of integrated return volatility (IV) for Ito-semimartingale asset prices. However, when observed prices are contaminated with an additive market microstructure noise (MMN), an asymptotic bias appears, and, therefore, it becomes necessar...
The Effect of margin changes on futures market volume and trading
Erken, Çiğdem; Danışoğlu, Seza; Department of Financial Mathematics (2016)
Margins are performance bonds that are designed to protect market participants and the market as a whole against investor default. Academic interest in analyzing margins started in the late 1960s and the number of studies increased parallel to the growth of the derivatives markets. Studies on margins mostly focus on optimal margin rules, regulations on margins and the impact of margin levels on trading activity. The aim of this study is to determine the impact of margin levels and margin changes on trading ...
Citation Formats
A. Özbilge, “An Analysis of momentum and mean reversion effects on equity indices,” M.S. - Master of Science, Middle East Technical University, 2015.