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TUTORIAL 3 - Solutions
Momentum Trading strategy
写留学生论文Is there any evidence of momentum in the warrants markets? Develop a methodology to test this strategy in the options markets.

Momentum defies the notion that efficiency in the markets exist because momentum relies on markets to either over-react or under-react in order to obtain abnormal returns. As defined by Jegadeesh and Titman (1993), momentum is a trading strategy where traders buy well performing stocks and sell poor performing stocks based on their past performances. Their research found that as long as over-reaction or under-reaction exist, momentum strategies can be adopted. They applied their strategies to that of the New York (NYSE) and American Stock Exchange (AMEX) and were able to achieve excess returns in those markets.

Arena et al. (2008), Fetcher (2007) and Campbell et al. (2001) discussed about the existence of idiosyncratic volatility (IVol). Most recently, Arena et al. (2008) were able to find a link between 'IVol' risk and the momentum effects in stock returns. Furthermore, they found that stocks with higher 'IVol' displayed greater momentum than do stocks with lower IVol. Moreover, Arena et al. (2008) found that high IVol stocks experienced quicker and larger reversals and found evidence suggesting that momentum profits was due to under-reactions from firm-specific information.

Lee and Swaminathan (2000) found evidence of momentum in the United States. Their research found that past trading volume may not help in predicting future returns but help to indicate a momentum reversal. Other studies that shows evidence of momentum profits includes Cleary and Inglise(1998) in Canada, Rouwenhorst (1998) in Europe, Rouwenhorst (1999) in emerging markets, Chan, Hameed and Tong (2000) in 23 stock market indices, Liu and Lee (2001) in Japan, Hameed and Kusnadi (2002) in Asian markets, Kang, Liu and Ni (2002) in China, Hurn and Pavlov (2003) in Australia and Gunasekarge and Kot (2007) in New Zealand.

More recently, Ramiah, Naughton and Veeraraghavan (2009) found substantial momentum profits in Singapore and that trading volume can only predict the persistence and reversal of momentum patterns with holding periods beyond one year.

It should be noted that applying a momentum trading strategy in the physical equity market may not be a practical approach given that there are short selling restrictions in the equity markets, even though they vary from country to country. For example, naked short selling is banned in Australia. Therefore, creating a zero cost portfolio such as the one mentioned in the methodology for Ramiah, Naughton and Veeraraghavan (2009) would not be viable in the real world.

While momentum trading are more commonly applied to the typical stock markets, we do find that momentum has been tested in the warrants market. Ramiah et al (2007) for instance tested this strategy in the Australian warrants markets. We also find that Naughton, Sy and Ramiah (2007) apply momentum strategies in the warrant markets in six asian countries. (i.e: HK, Japan, Korea, Malaysia, Singapore and Taiwan).

Therefore using the methodology applied by Lee and Swaminathan (2000); and Ramiah et al. (2007), the following strategies will be implemented to measure momentum returns in the options market.

Methodology
Applying momentum trading in the options market is very similar to applying it to the normal equity markets. 本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。