A STUDY OF MOMENTUM AND

CONTRARIAN PROFITS IN PAKISTAN

STOCK MARKET

Presented by :
FAISAL MUNEER (58221)
INTRODUCTION:

To check the effectiveness of two famous technical analysis tools that are
Momentum and Contrarian strategies in predicting the share price changes
in the market that are Momentum and Contrarian strategies in predicting
the share price changes in the market.

Investment companies, mutual fund managers and even for small investors
who want to improve their investment strategies by using momentum
strategies in short period and contrarian strategies in long term by checking
their presence in PSX.
PROBLEM STATEMENT:
Profit maximization is the key factor for those who are investing in stocks.
Momentum & Contrarian both strategies are very useful from many years and there
is a need of research in PSX by checking their presence and by using different
formation and holding periods is required to check the impact of these changes on
stock returns
Also which one is more beneficial in PSX among both.

The study further examined the similarities and difference in momentum and long-
term contrarian profitability using multiple return computation method.
PURPOSE OF THE STUDY:

In many developed countries there is an evidence that momentum and

contrarian profits exist in the security market.

We will provide the information to an Investment companies, mutual fund

managers and even for small investors who want to improve their profits
The main beneficiaries of this study will be investors & shareholders for
their consideration regarding investment in Pakistan stocks by checking
existence & relevance of both strategies.
RESEARCH QUESTIONS:

Does significant momentum profit exist in PSX?

Does significant contrarian profit exist in PSX?
Does the average returns of momentum investment strategy for high cap
stocks are less than those for low cap stocks?
Does the average returns of contrarian investment strategy for high cap
stocks are less than those for low cap stocks?
RESEARCH OBJECTIVES:

Generate the momentum and contrarian return according to the winners and
losers returns.
Generate the momentum and contrarian returns based on different market
capitalization.
To check which one is more beneficial between momentum and contrarian
profits.
HYPOTHESES:

H10: Winners & Losers have the similar returns in the holding period.
H1A: Returns of winners are greater than that of Losers in the holding period.

H10: Losers & winners have the similar returns in the holding period.
H2A: Losers portfolio returns are greater than the winner returns in the holding period.

H10: There is no relationship between higher cap stocks & superior return.
H3A: There is relationship between higher cap stocks & superior return.
METHODOLOGY:
RESEARCH APPROACH: Deductive Approach

DATA SAMPLING TECHNIQUE: Random Sampling Technique

STATISTICAL ANALYSIS TOOL: STATA Software, MS EXCEL

STATISTICAL METHOD: T TEST

SAMPLE SIZE: 50 COMPANES

 HOLDING PERIOD 3

Summary of Past-Return Based Portfolios using Arithmetic Summary of Past-Return Based Portfolios using Buy & Hold

Form Period: 3 months Form Period: 3 months

(ACAR) (ACAR)
Portfolio Hold.=3 Hold.=6 Hold.=9 Hold.=1 Portfolio Hold.=3 Hold.=6 Hold.=9 Hold.=12
2

Win (W) 0.0051* 0.0291* 0.0168* 0.0124* Win (W) 0.0047 0.0290 0.0164 0.0164

p values (0.000) (0.000) (0.001) (0.020) p values (0.000) (0.0003) (0.0012) (0.0218)

Loser (L) 0.0004 0.0129 0.0164* 0.0079 Loser (L) 0.0002 0.0127 0.0159 0.0077

p values (0.0570) (0.089) (0.018) (0.071) p values (0.0570) (0.0879) (0.0175) (0.0717)

(W-L) 0.0047 0.0162 0.0004 0.0045 (W-L) 0.0045 0.0162 0.0005 0.0087

t-values 2.409 3.298 3.175 4.058

t-values 2.457 3.351 3.109 4.171
HOLDING PERIOD 3

Summary Statistics of Past-Return Size Based Portfolios using Arithmetic return method
Formation Period : 3 months
Average Cumulative Abnormal Return (ACAR)
Portfolio Hold.=3 Hold.=6 Hold.=9 Hold.=12

Win (W) 0.0298 0.0641* 0.0472* 0.0277*

p values (0.067) (0.0170) (0.0135) (0.0362)

Loser (L) 0.0000* -0.0010* 0.0195* 0.0043

p values (0.0220) (0.0139) (0.009) (0.09)

(W-L) 0.0298 0.0651 0.0276 0.0234

t-values 0.187 -0.0203 -0.885 -0.52

HOLDING PERIOD 6
Summary of Past-Return Based Portfolios using Arithmetic Summary of Past-Return Based Portfolios using Buy & Hold
Form Period: 6 months Form Period: 6 months
(ACAR) (ACAR)
Portfolio Hold.=3 Hold.=6 Hold.=9 Hold.=12 Portfolio Hold.=3 Hold.=6 Hold.=9 Hold.=12

Win (W) 0.1069* 0.0771* 0.0506* 0.0433* Win (W) 0.1065* 0.0766* 0.0503* 0.0430*
p values (0.001) (0.000) (0.021) (0.003)
p values (0.002) (0.000) (0.022) (0.003)

Loser (L) -0.0166* 0.0196* 0.0205 0.0312*

Loser (L) -0.0159* 0.0185* 0.0200 0.0299*
p values (0.0337) (0.001) (0.0594) (0.029)
p values (0.0383) (0.001) (0.0617) (0.032)

(W-L) 0.1236 0.0574 0.0302 0.0121

(W-L) 0.1224 0.0581 0.0303 0.0131

t-values 4.954 3.263 3.664 5.137 t-values 5.028 3.195 3.570 5.297
HOLDING PERIOD 6
Summary Statistics of Past-Return Size Based Portfolios using Arithmetic return method
Formation Period : 6 months
Average Cumulative Abnormal Return (ACAR)
Portfolio Hold.=3 Hold.=6 Hold.=9 Hold.=12

Win (W) 0.0226* 0.0230* 0.0140 0.0225*

p values (0.0403) (0.0258) (0.0655) (0.0116)

Loser (L) -0.0181* -0.0057* -0.0119* 0.0011*

p values (0.0357) (0.011) (0.0173) (0.0106)

(W-L)

0.0408 0.0287 0.0259 0.0215

t-values -0.147 1.004 -0.531 0.152
 HOLDING PERIOD 36
Summary of Past-Return Based Portfolios using Buy & Hold
Summary of Past-Return Based Portfolios using Arithmetic Form Period: 36 months
Form Period: 36 months
(ACAR)
(ACAR) Portfolio Hold.=12 Hold.=18 Hold.=24 Hold.=36
Portfolio Hold.=1 Hold.=18 Hold.=2 Hold.=36
2 4

Win (W) 0.0289* 0.0276* 0.0279* 0.0287* Win (W) 0.0289* 0.0276* 0.0279* 0.0287*

p values (0.040) (0.017) (0.019) (0.000) p values (0.041) (0.018) (0.020) (0.020)

Loser (L) -0.0142* -0.0052 -0.0094 -0.0085* Loser (L) -0.0094* -0.0052 -0.0094 -0.0085*
p values (0.022) (0.326) (0.422) (0.027)
p values (0.021) (0.313) (0.412) (0.026)

(L-W) -0.0431 -0.0328 -0.0373 -0.0372

(L-W) -0.0383 -0.0328 -0.0373 -0.0372

t-values 3.401 2.886 2.664 6.386 t-values 3.409 2.902 2.660 6.481
HOLDING PERIOD 36

Summary Statistics of Past-Return Size Based Portfolios using Arithmetic return method
Formation Period : 36 months

Average Cumulative Abnormal Return (ACAR)

Portfolio Hold.=12 Hold.=18 Hold.=24 Hold.=36

Win (W)
0.0041 0.0099* 0.0047 0.0052*
p values (0.0677) (0.0317) (0.0606) (0.0414)

Loser (L)
0.0019 -0.0044* 0.0245* 0.0100*
p values (0.072) (0.0324) (0.0133) (0.028)

(L-W)

-0.0022 -0.0143 0.0198 0.0049

t-values -0.8703 0.1274 -0.5985 1.1706
 Both return Methods Comparison
FORM PERIOD 3
3 6 9 12
WINNER (Arith) 0.0051 0.0291 0.0168 0.0124
WINNER(buy & hold) 0.0047 0.0290 0.0164 0.0164
LOSER (Arith) 0.0004 0.0129 0.0164 0.0079
LOSER(buy & hold) 0.0002 0.0127 0.0159 0.0077
Arbitrage (W-L) ARITH 0.0047 0.0162 0.0004 0.0045
Arbitrage (W-L) BUY & HOLD 0.0045 0.0162 0.0005 0.0087
t-values 2.457 3.351 3.109 4.171
2.409 3.298 3.175 4.058
FORM PERIOD 6
3 6 9 12
WINNER (Arith) 0.1069 0.0771 0.0506 0.0433
WINNER(buy & hold) 0.1065 0.0766 0.0503 0.0430
LOSER (Arith) -0.0166 0.0196 0.0205 0.0312
LOSER(buy & hold) -0.0159 0.0185 0.0200 0.0299
(W-L) ARITH 0.1236 0.0574 0.0302 0.0121
(W-L) BUY & HOLD 0.1224 0.0581 0.0303 0.0131
t-values 4.954 3.263 3.664 5.137
5.028 3.195 3.570 5.297
FORM PERIOD 36
12 18 24 36
WINNER (Arith) 0.0289 0.0276 0.0279 0.0287
WINNER(buy & hold) 0.0289 0.0276 0.0279 0.0287
LOSER (Arith) -0.0142 -0.0052 -0.0094 -0.0085
LOSER(buy & hold) -0.0094 -0.0052 -0.0094 -0.0085
(L-W) ARITH -0.0431 -0.0328 -0.0373 -0.0372
(L-W) BUY & HOLD -0.0383 -0.0328 -0.0373 -0.0372
t-values 3.401 2.886 2.664 6.386
3.409 2.902 2.660 6.481
CONCLUSION
Returns of arithmetic return (w-l) as well loser, winner using both arithmetic and
Buy hold return method over the formation period of 3, 6 months, the past high
performing stocks (W) continue to do better than the past poor performing stocks
(L) over the next 3 to 12 months.
Over the longer time of 36 months, the past low performing stocks (L) do not
seems to be outperform the past high performing stocks. Therefore, no contrarian
profits are observed over the formation and holding period of 36 months.
Overall we can say that the momentum strategies found to be more profitable
than contrarian.
RECOMMENDATION..
To check the momentum and contrarian profitability more holding and formation
periods can be formed over longer horizon.
Also the work may be extended to other emerging markets to check if momentum
patterns are robust across these markets and to find out implications for global
portfolio management strategies.