Momentum effect confirmed within KOSPI 200:
High past-return stocks continue rising, and low past-return stocks continue falling.
Aligns with Jegadeesh & Titman (1993) findings.
Momentum Universe Shrinkage Effect:
Momentum effects are stronger in certain subuniverses than in the full KOSPI 200.
Some stocks may act as noise, diluting overall momentum strategy performance.
Large-cap stocks weaken the momentum effect:
KOSPI 50 stocks reduce momentum strategy returns.
High information efficiency and institutional ownership in large caps make momentum strategies less effective.
Foreign investor influence:
Foreign investors’ preferences for certain stocks may distort momentum effects.
Excluding stocks heavily traded by foreign investors may improve strategy performance.
Opinion
This study highlights that while momentum effects exist in Korea, they are less effective in large-cap stocks due to higher information efficiency and institutional trading dominance.
The research also raises an important point: foreign investor trading patterns can interfere with momentum effects, suggesting that investors should tailor their strategies accordingly.
For optimal results, a mid- and small-cap-focused momentum strategy may be more effective, avoiding foreign investor-dominated stocks and refining stock selection within subuniverses.
Core Sell Point
Momentum strategies work in the Korean stock market, but large-cap stocks weaken their effectiveness. By adjusting for market size and foreign investor influence, investors can enhance momentum strategy performance.
"Momentum Universe Shrinkage Effect in Price Momentum" This study examines the existence of price momentum effects in the Korean stock market and analyzes how the performance of momentum strategies changes as the market universe shrinks.
1. Research Objectives
Verify whether the momentum effect exists within the KOSPI 200 index.
Construct subuniverses based on market size and evaluate momentum strategy performance in each subset.
Analyze the impact of foreign investors' trading patterns on the momentum effect.
2. Research Methodology
Used daily stock price data from January 1980 to December 2011 for KOSPI 200 constituents.
Divided stocks into subuniverses based on market capitalization.
Applied a traditional momentum strategy, ranking stocks by past returns to form winner and loser portfolios and measuring future performance.
Analyzed how trading patterns of different investor groups (individuals, institutions, and foreign investors) affected returns.
3. Key Findings
Momentum effect exists in the KOSPI 200:
Stocks with high past returns (winners) tend to continue rising, while low past-return stocks (losers) tend to keep falling.
Confirms the classic momentum effect, consistent with Jegadeesh & Titman (1993).
Momentum Universe Shrinkage Effect:
Momentum strategy performance is stronger in specific subuniverses (e.g., excluding KOSPI 50 stocks).
Suggests that momentum effects are more pronounced in certain company sizes and that larger companies may dilute overall momentum performance due to noise.
Negative impact of KOSPI 50 large-cap stocks:
Top 50 largest market cap stocks weaken the momentum effect.
Large-cap stocks exhibit high information efficiency, causing momentum effects to fade quickly.
The high institutional ownership of large-cap stocks may limit the effectiveness of short-term momentum strategies used by retail investors.
Foreign investors' influence:
Foreign investors' trading patterns may dilute the momentum universe shrinkage effect.
This may be due to foreign investors favoring specific large-cap stocks or preferring certain trading strategies.
Excluding stocks favored by foreign investors could improve momentum strategy performance for retail investors.
Conclusion
This study confirms the presence of momentum effects in the Korean stock market, but their effectiveness varies depending on market size and investor composition. To enhance momentum strategy performance, investors should exclude large-cap stocks and consider the impact of foreign investor trading patterns.
[Compliance Note]
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The content of this post may be inaccurate, and any profits or losses resulting from trades are solely the responsibility of the investor.
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