An Analysis of momentum and mean reversion effects on equity indices

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Date

2015

Author

Özbilge, Armağan

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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.

Subject Keywords

Stocks., Stock exchanges., Capital market., Money market.

URI

http://etd.lib.metu.edu.tr/upload/12618940/index.pdf
https://hdl.handle.net/11511/24787

Collections

Graduate School of Applied Mathematics, Thesis

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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.