MOMENTUM AND LIQUIDITY ON THE JOHANNESBURG STOCK EXCHANGE

Abstract

Short-term price momentum has become a globally popular topic of research, with a plethora of international evidence proving its profitability. This paper investigates short and medium term momentum strategies on the Johannesburg Stock Exchange (JSE) over the period January 1995 to December 2010. The study further considers the interaction between momentum and liquidity, proxied by turnover. We find that there is a significant momentum effect on the JSE over the sample period, yet the magnitude of profits declines in the latter half of the sample. When combining liquidity with momentum, the high and intermediate liquidity momentum strategies achieve consistently significant average excess returns, yet the low liquidity momentum results are largely inconsistent and insignificant. The findings of this paper are in line with the behavioural decomposition of the momentum effect, as there is evidence of both a short-term momentum effect and the beginnings of a longer-term reversal.

Keywords

• Momentum, JSE, Liquidity

References

1. estimation and holding periods of three, six and twelve months. This result may imply that in periods of market growth, portfolio estimation and holding periods should be intermediate (between six and nine months) while in periods of market contraction, more extreme estimation and holding periods should be used (three, six and twelve months).
2. The results of the liquidity sorted momentum portfolios are inconsistent with the findings of Demir et al (2004) yet in line with those of Lee and Swaminathan (2000). We find that the high and medium liquidity momentum portfolios outperform the low liquidity momentum portfolios on an absolute return basis and illiquidity seems to have a significantly negative effect on momentum profits. The findings are not surprising when viewed in light of the behavioural