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Amanpreet Singh
UP687606
March 2017
Accounting and Finance Dissertation (U21079) Student ID: UP687606
Declaration of originality
I, the undersigned, declare that this dissertation is my own original work. Where I have taken
ideas and/or wording from another source that is explicitly referenced in text.
I give permission that this dissertation may be copied and made available through the
university library, in printed form and/or electronic form.
I provide a copy of the electronic source from which this dissertation was printed. I give my
permission for this dissertation, and electronic source, to be used in any manner considered
necessary to fulfil the requirement of the University of Portsmouth Regulation, Procedures
and Codes of Practice.
Signed:.. Date:..
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Acknowledgements
I faced a number of challenges during the dissertation topic, but with the constant support of
the people around me, this gave me the motivation and drive to keep going forward, and give
it my best.
Firstly, I owe my deepest gratitude to my parents, immigrants from India who settled down in
the UK in the 80s. They are both my biggest role models, hearing their stories about their
initial struggles, and the hard work they both put in on a daily basis to be where they are
today. And without them, I wouldnt be where I am today, being the first in the family to go
to University, I hope I can make them proud.
I would like to give my biggest thanks to my Supervisor Lena Itangata, for her guidance,
encouragement and supervision and support of my dissertation topic, without her guidance,
this research study would never have been completed.
I would also like to thank Louisa Burton, for her support and guidance throughout the year,
and I would also like to thank Shaling Li, for her initial support and guidance.
Also, I heartily thank Gurinder Kaur for her continuous support throughout my final year at
the University of Portsmouth.
Lastly, I offer my regards to all the academic staff at the University of Portsmouth, who have
thought me all the theory regarding accounting and finance, whilst also keeping the course
interesting and meaningful, which will help shape my future career.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Abstract
A number of studies have illustrated that stock returns may be predictable through
implementing a momentum trading strategy, which contradicts the whole concept of the
Efficient Market Hypothesis. This paper will discuss the Efficient Market Hypothesis and
focus on its challenges in the face of behavioural finance. In addition, empirical research is
conducted to test whether a momentum strategy can be implemented to successfully beat the
market. This paper draws on the framework developed by Jegadeesh & Titman (1993), while
also taking ideas from other relevant scholars in the field, and analyses the monthly returns
generated from the momentum strategy used, examining whether the returns in each
constructed portfolio is greater than the return of the UK stock market (FTSE All-Share
market index) for the period 2016, based around Brexit, an event which had an influence on
the stock market as a whole, and construct another set of portfolios one-year prior to the
event, to act as a control for comparability and to test validity of the momentum strategy
being used to generate excess returns. From the empirical data, it is seen that in the Brexit
portfolios, every portfolio beat the market, however for the pre-Brexit portfolio, a few
portfolios underperformed the market, with the majority beating the market. Although the
two time periods tested had dissimilar results, this paper can still confirm that the use of the
momentum strategy can be used to predict future returns, and manage to earn abnormal
returns.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Table of Contents
DECLARATION OF ORIGINALITY 1
ACKNOWLEDGEMENTS 2
ABSTRACT 3
CHAPTER 1: INTRODUCTION 6
1.2 Rationale 7
2.3 Anomalies 18
2.3.1 The calendar effect 19
2.3.1.1 The January effect 19
CHAPTER 3: METHODOLOGY 24
3.1 Introduction 24
3.2 Data 24
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3.3.2 One year prior to United Kingdoms withdrawal from the European Union (pre-Brexit) 25
4.1 Findings 30
4.1.1 Results for 3-months formation period 33
4.1.2 Results for 6-months formation period 34
4.1.3 Results for 9-months formation period 35
4.1.4 Results for 12-months formation period 36
CHAPTER 5: CONCLUSION 41
5.1 Summary 41
NOTES 43
BIBLIOGRAPHY 44
APPENDIX 48
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Chapter 1: Introduction
This dissertation examines whether a momentum trading strategy can be implemented to beat
the UK stock market, using two time periods, one which is based around an event which has
had a significant effect on the UK stock market, and the other which is one year prior to this
event. This chapter presents the background and rationale to the research and provides an
overview of the research objectives and the structure of the remaining chapters in this
dissertation.
In existing research, many scholars have found evidence of implementing trading strategies
and rules, with research based around examining historical stock market data. Many
academics have studied the momentum effect, which involves holding long positions in past
winners (best performing stocks) and holding short positions in past losers (worst performing
stocks), which have been shown to earn significant returns in the 3 to 12 month horizon.
Early research by Jegadeesh & Titman (1993) and many later studies in this area has
constantly been challenging the whole concept of market efficiency, suggesting that markets
may not be as efficient, with many papers supporting behavioural finance theory, that many
market inefficiencies exist and follow certain patterns that can be subjugated.
The focus of this dissertation is to test for this momentum effect in the UK stock market, a
market which is perceived to be developed, thus a market which is efficient, as most research
in the field of finance and investment has focused on developed markets, such as the NYSE
and NASDAQ, hence only being appropriate to test this strategy in a similar capital market.
This paper will therefore investigate the presence and profitability of momentum, and
whether this strategy can be applied to beat the UK stock market.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
1.2 Rationale
This study is inspired by the desire to gain a greater understanding of the financial markets,
through implementing momentum trading strategies and examining anomalies to exploit any
market inefficiencies. The research is motivated by a strong personal interest in the general
topic areas and perceived gaps in existing literature. Moreover, financial market efficiency is
the central importance to practitioners, investors, corporations and regulators, with financial
theory being based around the belief that financial agents and markets are rational.
Furthermore, investors depend greatly on strategies which observe stock market behaviour, a
key focus of this research. Also, with the continuous success of individuals such as George
Soros and Warren Buffett, they represent the most immutable contradiction of market
efficiency theories, that returns are unpredictable.
To further add to the rationale of this study, the research has also been driven by Dickinson &
Muragu (1994) mentioning that an efficient market does not have to be perfect, with Ross,
Westerfield and Jordan (2010) concluding that all perfect markets are efficient, but it is not
necessary for efficient markets to be perfect.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
The literature review looks into existing research and aims to prepare and guide the reader for
the following methodology, results and analysis of the research carried out in this paper. This
chapter will review the EMH, followed by market efficiency tests conducted by prior
researchers, explaining the researched anomalies around this topic and narrowing down into
current literature on momentum.
Chapter 3: Methodology
This chapter will outline the methodological approach that is applied for this study. This
chapter gives detailed explanation of the methods used, taking ideas from existing research in
the topic area. The methodology will also enable future replications of the study.
The results are displayed, explained and discussed in this chapter, explicitly referring back to
the research questions and hypothesis. This chapter will also further provide statistical tests to
give some validity to the findings, and any anomalies which have been discussed in chapter 2
will also be examined.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Chapter 5: Conclusion
This chapter will summarise and derive conclusions from the study conducted, while
referring back to previous studies in the topic area, as well as providing limitations of the
study, whilst also recommending suggestions for future research.
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Referring to the EMH developed in Eugene Famas study in 1970 and 1991, Fama (1970 &
1991) classifies EMH into three forms of capital market efficiency based on the type of
information reflected in a stocks price:
1. Weak-Form Efficiency: In its least rigorous form, this level of efficiency is where the
price in a market fully reflects all information contained in historical prices, including
historical sequence of prices, rates of return, trading volume data and any other
market generated information. Therefore, the weak-form efficiency suggests no
investor can develop a trading strategy based on historical price patterns to generate
abnormal returns. Thus, if this assumption is valid, technical analysis used to predict
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
future stock prices would be an ineffective strategy as the price assumes the
characteristics of a random walk.
2. Semi-Strong Form Efficiency: In its slightly less rigorous form, the EMH says a
market is efficient if a stocks price instantaneously reflects any publically available
information. Such information includes profit & loss accounts, balance sheets and
company announcements. Therefore, if the semi-strong form efficiency is valid, no
investor is able to make abnormal returns from good news, as this would be reflected
in the price immediately. Hence, being unable to generate abnormal returns through
fundamental analysis, as the market will quickly digest the publication of new
information by moving the price to a new equilibrium level that reflects the change in
supply and demand.
3. Strong-Form Efficiency: In its strongest form, the EMH states a market is efficient if a
stocks price fully reflects all information, both public and private. This suggests, no
investor would be able to generate abnormal returns, as the market quickly and
accurately reflects all information relevant to the value of a share. Even if a small
group of people have insider information, they still cannot make profits exceeding the
average market return. However, this efficiency suffers, as it is difficult to obtain
empirical evidence, as it is unlikely to win the cooperation of the relevant section of
the financial community (insider dealers).
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Fama (1970) also mentions that in essence you must define what the term fully reflect
exactly means, thus the EMH is split into different forms (mentioned earlier) due to the fact
that it is difficult to find evidence for insiders. Weak-form and semi-strong form is usually
tested empirically, but testing the strong form is difficult.
In essence, the aim of the tests is to check whether share prices respond quickly to new
information, the changes in the predictions of returns should be associated with the change of
their investment risk and whether making excessive returns through trading rules is
unachievable.
This approach is part of the serial correlation tests, aimed at focusing the trader on long-term
trends whilst filtering out short-term movements (Arnold, 2002). This rule involves
purchasing a stock when its price increase is at least x%, then holding it until the fall of the
stock price is at least x% in comparison with the previous high price, then selling the stock
until the price has risen to at least x% in comparison with the previous low price. Alexander
(1961) found that there is no filter rule which can systematically return abnormal profits.
These results were later confirmed in research conducted by Fama & Blume (1966) who also
found that you could not make abnormal returns using a filter rule.
Furthermore, except for the filter rule, the autocorrelation function (ACF) and partial
autocorrelation function (PACF) is also used to find the inefficiency amongst a stocks price
in the presence of a serial correlation.
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Assuming a time series {Xt}, the ACF of a time between t and s is defined as:
The Dow Theory was first suggested in the late 1800s and developed by Charles Dow
himself. This theory distinguishes a stock price movement by three basic trend types as,
primary trends3, secondary movements4 and tertiary moves5. Cowles (1933) conducted a
study where one portfolio devised a simple buy-and-hold strategy and the other using the
Dow Theory strategy. The results found that the buy-and-hold strategy performed better than
the Dow strategy by 3.5%.
Further research done by Kendall (1953) concluded that a stock price behaves where each
outcome is statistically independent of past history, similar to a roulette wheel. Roberts
(1959) built up on this conclusion, using a chance model to produce a movement series
which was compared to the Dow Jones Industrial Average movement. His findings showed
an unmistakable resemblance between the chance model (randomly generated pattern) and
the Dow Jones index, concluding that the price changes of the index were as random as the
ones generated by his model, therefore the stock price being unpredictable. Figure 1
illustrates the simulated stock price movements during a fifty-two week period and figure 2
illustrates the real levels of the Dow Jones industrial index, also during the same fifty-two
week period.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Figure 1- Movements using chance model Figure 2 Dow Jones Industrial Index
Studies of the semi-strong form can be regarded as testing the speed of adjustment of prices
to new information, event studies have been the principle research tool in this area. Dimson
& Mussavian (1998) states an event study as the averages of the cumulative performance of
shares over time, from a number of time periods before an event up until a number of time
periods after.
Undertaking an event study, the excess return can be calculated by subtracting the market
return from the stocks actual return. The market return can be a portfolio index or an
expected return calculated from an asset pricing model, such as CAPM.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
i.e.:
Or either:
Furthermore, the average excess return across all firms on day t can be shown as:
Through calculating the excess stock return for the days leading up to and following any
events, the speed of adjustment of stock returns can be displayed. Fama, Fisher, Jenson &
Roll (1969) are known to be the first to undertake such a study using this analysis.
Moreover, MacKinlay (1997) used the event study to investigate an earnings announcement.
The results of his study show that good news firms showed higher cumulative returns,
especially on day 0 (the event day). His results are show in figure 3.
Figure 3 Plot of cumulative abnormal return for earning announcements from event day -20
to event day 20. The abnormal return is calculated using the constant mean return model as
the normal return.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Building up on event studies, a stock split is where the number of shares in a listed company
increases, and the price is adjusted so that the market capitalisation of a firm remains the
same after the split. In its crudest form, stock splits do not have any economic value, neither
does it create addition shareholder wealth.
Fama, Fisher, Jenson & Roll (1969) examined the effect of stock split events on a share price
through using data from the NYSE from 1929 until 1959. Their results show that 80% of the
time, a stock split was followed by an announcement for dividend increase. But, unlike a
stock split, a dividend increase adds value to shareholders, thus investors can use stock splits
as an indicator for the possibility of a dividend increase. If the semi-strong form is valid, then
information should be reflected in a stocks price instantly from the moment when the stock
split is announced. Fama, Fisher, Jenson & Roll (1969) displayed their results in three
different categories all splits, splits with dividend increases and splits with no dividend.
These results are shown in figure 4-6.
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Figure 6 No dividends
From the observed pattern in this study, it is consistent with the EMH, as the share price had
already reflected the information which became publically available, thus this study supports
the semi-strong form, where there is no opportunity for an investor to earn abnormal profits
after a stock split announcement. However, it has been argued that splits increase the
proportional trading costs of stock and investors should require higher returns to make up for
these higher trading costs.
The main focus of the strong-form efficiency are on mutual funds, managers and investment
specialists, people who could possibly have information that is not yet available to the public.
Tests such as mutual fund performance compares the return of various mutual funds with the
returns of randomly constructed portfolios. Studies such as Malkiel (1995) and Elton, Gruber,
Das & Hlavka (1993) evaluate mutual funds, due to the belief that mutual funds hold
information which is not yet publically available, due to heavy investment. They find that
mutual funds on average fail to beat the market. Thus no single fund could possibly achieve
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
abnormal returns than what could be expected by random chance, which supports the null
hypothesis that there is no difference between random portfolios and mutual fund schemes.
Nonetheless, some mutual funds have achieved minor abnormal returns. It is important to
note that the EMH does not rule out minor excess returns, thus analysts can still be
encouraged to act on valuable information, nonetheless, investors would still expect no more
than an average net return. This idea is shown by Grossman & Stiglitz (1980), who
formulises that a sensible model of equilibrium must leave some incentive for security
analysis. They also further observe that in a world of costly information, it is impossible for
markets to be informationally efficient6.
2.3 Anomalies
The EMH has been debated greatly, and has received criticism by researchers due to its non-
validity. In the 1980s many scholars believed that you could earn abnormal profits, as it can
be possible to predict the direction of future stock price changes, thus being inconsistent with
the EMH. However, many also argue that the possibility to predict the direction of stock
trends would not violate the EMH, as the equilibrium would be reached either in the short-run
or in the long-run.
Moreover, if there is market inefficiency, it is possible to predict the changes of the stock
prices and make excess return, as it can be said that there are market anomalies in the
financial markets. Such market anomalies are calendar effects, which will be discussed in this
section.
This section will also focus on behavioural finance, which is referred as open-minded
finance by Thaler (1993). It has been argued that with behavioural finance recognising the
standard finance model of profit maximisation and rational behaviour, which can be true
within specific boundaries, it fails to consider individual behaviour, as noted by Olsen (1998).
Behavioural finance focuses on the psychology on market players and their impact on the
capital markets. This makes many scholars consider the chances that the markets might not
be as efficient as said by the EMH, also with increasing evidence contradicting the EMH, this
gives ground to challenge the idea that investors behave rationally.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Current literature refer to various calendar effects, but in this subsection, the most popular
calendar effect will be highlighted, the January effect, an anomaly which will also be
examined in the empirical results of this study.
Most empirical studies on monthly patterns report the January effect as a major finding, with
reference to earning abnormal profits during this month compared to the rest of the year.
Rozeff & Kinney (1976) and Gultekin & Gultekin (1983) use US stock market data, finding
that the month of January provided higher returns compared to other months. These results
are consistent with other markets, Nassir & Mohammed (1987) reported that January returns
were significantly higher than other months in Malaysia, with Balaban (1995) showing
similar results with Turkey. However, Fountas & Segerdakis (2002) tested for this effect,
using monthly stock returns in eighteen emerging stock markets, finding very little evidence
for the January effect.
A possible explanation for this phenomenon could be factors such as capital taxation, where
investors sell stocks at the end of the year to claim capital losses and offset the tax liability
with the capital gains and then reinvest at the start of the following year. Another explanation
could be firms window dressing, improving the appearance of the portfolio before presenting
to shareholders and clients.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Although long-term and short-term contrarian profits and over-reaction to information seems
probable, a number of studies empirically provide results for the medium-term (e.g.
Jegadeesh & Titman (1993) and Conrad & Kaul (1998)). Research suggests that stock prices
under-react to publically available information, where this under-reaction creates profitable
momentum profits. For example, earning profits from a strategy where an investor goes long
on a portfolio which consists of shares that have performed well in the past (prior winners)
and going short on a portfolio which consists of shares that have performed poorly in the past
(prior losers).
Literature provides many explanations for these anomalies. Conrad & Kaul (1993) point out
that the reason of these contrarian profits can be due to bid-ask biases and infrequent trading,
while market behaviour following one day stock price declines has been examined by Cox &
Peterson (1994), where they find evidence consistent with the bid-ask bounce and liquidity as
a clarification of price reversals. Chan (1988) argues the fact that excess returns could be due
to the changes in the equilibrium required returns, Ball & Kothari (1989) also argues the
same issue. Furthermore, it has been pointed out by Lo & MacKinlay (1990) that some stocks
react more rapidly than others in the light of new information, hence a contrarian strategy
could still produce profits, even if neither stock over-reacts to information. For example, a
lead-lag relationship between returns is a crucial factor that contributes towards contrarian
profits, although it has been demonstrated by Jegadeesh & Titman (1995) that delayed
reactions cannot be exploited by contrarian strategies.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Furthermore, many studies also try to explain the predictability of returns within an over-
reaction and/or under-reaction context employing behavioural models. Such as Daniel,
Hirshleifer & Subrahmanyam (1998) mention that investors are overconfident, where self-
attribution bias is present. They discuss that the arrival of information that either confirms or
disconfirms investors private information will result in an asymmetric reaction, therefore
resulting in an over-reaction and return momentum in the short-run following the arrival of
confirming news. Moreover, Hong & Stein (1999) mention that there are two types of
investors. One that relies on their private information, and the other who rely on past price
information (i.e. momentum traders), they develop a model which predicts initial under-
reaction and subsequent over-reaction to information.
Many scholars imply that a positive autocorrelation at short-time intervals may result in
profitable trading opportunities. Jegadeesh & Titman (1993, 1995) showed significant
positive returns when they traded stocks based on short-run historical returns. They reported
firms with higher returns in the past 3-12 month period outperformed firms with lower
returns in the same time period. Stocks were ranked in ascending order based on their past 3-
12 month returns, and form ten equally weighted deciles8 of stock portfolios. The bottom
decile was classified as the winner decile and the top decile as the loser decile. The strategy
was to buy the winner decile and sell the loser decile with 3, 6, 9 and 12 month holding
periods. From their 1993 study, it was reported that selecting stocks based on the past 12
month performance and holding this position for 3 months was the most successful strategy,
yielding the best results, as shown in figure 6.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Furthermore, with the use of the Fama-French three factor risk-adjusted return model,
Grundy & Martin (2001) reported a more than 1.3% profitability per month using momentum
strategies on the NYSE and AMEX stocks over the period 1966-1995. Like most studies on
momentum, they bought winners and went short on losers, but what differs in their research
was the adjustment for dynamic risk exposure. Grundy & Martin (2001) also conclude that
the momentum profits were remarkably stable across sub-periods of the entire post-1926 era,
whilst further mentioning that the cause of momentum is not due to industry effects nor
cross-sectional differences in expected returns. Moskowitz & Grinblatt (1999) found a strong
momentum effect when buying stocks from past winning industries and selling stocks from
past losing industries, it was still a highly profitable strategy even after controlling for cross-
sectional dispersion in mean returns and microstructure differences. Rouwenhorst (1998)
tested the profitability of momentum strategies using monthly total returns from 12 European
countries during 1980 and 1995. After correcting for risk, they found that the winner
portfolios outdid the loser portfolio by more than 1% per month. And the overall returns on
the momentum portfolios are similar to the findings of Jegadeesh & Titman (1993) study for
the US market.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
In the case of the UK, Clare & Thomas (1995) and Dissanaike (1997) report some evidence
of momentum. However, the focus of their studies were on long-run over-reaction rather than
short-term momentum effects. Clare & Thomas (1995) used a random sample of stocks from
the London Share Price Database (LSPD) over 1955-1990, and found weak evidence of
momentum at the 12 month horizon, but find significant evidence of over-reaction at the 24
and 36 month horizon. Also using data from the LSPD, Dissanaike (1997) used a larger
sample of stocks that are part of the FT500 Index over 1975 and 1991. They found evidence
of momentum up to the 24 month horizon, thus the results contradict the 24 month horizon
results of Clare & Thomas (1995). A paper by Liu, Norman & Xu (1999) concentrates on
short-term returns, recognising momentum profits being present in UK stock returns over the
period 1977 and 1996. Even after controlling for systematic risk, size, price and book-to-
market ratio, this did not destroy momentum profits. Moreover, they also examine
momentum profits in sub-samples of their dataset, and argue that in the UK equity market,
momentum effects are a robust feature.
In summary, the evidence from the above studies show that over the short-term to medium-
term horizons (3-12 months), momentum strategies are most profitable, while contrarian
strategies are more profitable over the very short-term (1-4 weeks) and long-term (36-60
months) horizon.
Also, studies such as Jegadeesh & Titman (1993) provide evidence which supports the views
of behavioural finance, where they identify certain trading rules (i.e. momentum strategy),
which allow for profits to be achieved based on past information. This rule will later form the
methodology of the research objective.
However, all of the positive returns from the momentum strategy has been contradicted by
Liu & Lees (2001) study. Their research concentrates on the Japanese stock market from
1975 to 1997. Their strategy was based on buying past 3-12 month winners and selling the
losers of the same period. But rather than reporting positive returns, their results gave an
average loss of 0.5% per month over the 3-12 month horizon. Liu & Lee tried to explain the
loss of this strategy through doing further tests. They extended the holding period past 12
months, which was not an effective strategy either. But one of the main causes was due to the
stock market tested itself, unlike other capital markets, the Japanese stock market shows no
evidence of any time series patterns and predictability, and stock prices seem to reverse rather
than continue.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Chapter 3: Methodology
3.1 Introduction
Following the literature discussed and the past research findings, this chapter aims to develop
a methodology which builds on the momentum effect within stocks, and further tests whether
or not this trading strategy allows an individual investor to earn profits in excess of the
market return (i.e. is it possible to beat the market?).
The EMH is based on the assumption that it is impossible to beat the market, with developed
stock markets (i.e. UK and USA) considered to be relatively efficient. This means that
developed stock markets would reflect all publically available information instantaneously,
implying that it is impossible to beat the market return using trading rules which involve
using historical information. Tests of the semi-strong form efficiency typically begin at time
t = 0, and portfolios are usually formed around an event, which has an effect on all stocks
that would be included in a portfolio.
If markets are truly efficient, then at time t > 0 the estimated residual portfolio returns should
be zero, but if there is evidence for consistent deviation from zero, this would provide
evidence against market efficiency.
The aim of this chapter is to outline the methodology used to test whether the momentum rule
can be used generate abnormal returns (inevitably beating the stock market), as illustrated by
research discussed in the literature review. The general idea of the methodology will be to
check how the strategy performs between different formation and holding periods. If the
methodology manages to stay consistently profitable throughout the testing period, it can be
applied in the future with greater confidence in its profitability. The next sections will outline
the details of the methodology conducted to fulfil the research objective.
3.2 Data
The empirical tests conducted will use stock market data from the UK stock market (FTSE
All-Share). The rationale behind using the UK market index as a proxy is because the UK is
perceived to be a developed stock market, hence according to the EMH, it would be
impossible to beat this market due to its market efficiency.
The online website www.investing.com will be used to pull out stock market data. This is the
preferred choice because it is easy to access and view, providing graphs which allows the
implementation of trend lines and oscillators (e.g. RSI indicator).
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
3.3.1 The United Kingdoms withdrawal from the European Union (Brexit)
As mentioned previously, Tests of the semi-strong form efficiency typically begin at time
t = 0, and portfolios are usually formed around an event. Thus, trading will start from the
date of the EU referendum result (24th July 2016). The market was not expecting the result to
be Brexit, this had a dramatic response. Major stock markets around the world saw large falls
and the pound weakened substantially, falling to a level not seen since the mid-1980s. The
result of Brexit means the UK market will be very difficult to predict, as the market is likely
to remain volatile. However what we can predict is that uncertainty regarding Britains future
trading relationship with the EU will contribute to a continued volatility in the interim period.
3.3.2 One year prior to United Kingdoms withdrawal from the European Union (pre-
Brexit)
For a comparison, a stock portfolio will also be formed one year prior to this event, this
would allow comparison, to justify whether a portfolio return is effected in the wake of a
national event such as Brexit. It also allows a side-by-side comparison of results which were
generated from using the same trading strategy or rule.
To calculate the momentum returns, the procedures suggested by DeBondt & Thaler (1985),
Lo & MacKinlay (1990) and Jegadeesh & Titman (1993) will be used. This is described in
the following steps:
1. Referring to the formula below, the cumulative monthly returns (CR) over the J
months prior to the portfolios formation date (i.e. J months before t = 0) will be
calculated. In the formula below, the value of n = J is the number of months in the
formation period, where ri is the stock return in month i. CR is also referred to as the
Formation Period Return (FPR).
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
2. After calculating the FPR for each portfolio at the end of each formation period, the
CR would be calculated again, but now for the K months after the formation date (i.e.
t > 0). This would be classified as the testing period, where CR is now referred to as
the holding period return (HPR). Furthermore, the Average Holding Period
Cumulative Returns (AHPCR) of a specific portfolio would be calculated as:
In the above formula, n is the number of months in the testing period, ri,j is the return
on stock j in the month i, and N is the number of stocks in a portfolio. Hence,
AHPCRBrexit would be the CR over the K month testing period of an equally weighted
portfolio of the stocks bought around the Brexit event, while AHPCRPre-Brexit would be
the CR over the K month testing period of an equally weighted portfolio of the stocks
bought the year prior to Brexit happening. But for the purpose of this assignment,
only the HPR would be calculated, which will then be compared to the CR of the UK
stock market to assess whether the formed portfolios managed to beat the market
using momentum trading strategies.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
4. Plus a time-averaged variance converging to zero if the probability of a loss does not
become zero in finite time.
Conclusively, if a transaction involves only a positive cash flow with no adverse cash flows
at any probabilistic or temporal state, then momentum exists when the short-term arbitrage
momentum trading strategy is used. Also, a positive return on the strategy can only be a result
of their being momentum in the market, which would provide towards empirical evidence for
momentum being present.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Also, to add strength to this study, and be able to provide further evidence, a further 16
portfolios will be formed, an ex-post-test (common in most research studies), which will be
investigating one year prior to Brexit. The portfolios will consist of formation periods J = [3,
6, 9 and 12 months], with holding period K = [3, 6, 9 and 12 months].
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
This chapter will focus on the findings of the tests carried out, through having two opposing
hypothesis (mentioned in the methodology) which will help answer the research objective of
whether a momentum strategy can be used to beat the market. This chapter will examine the
results of the research and further analyse and interpret the outcomes of this study.
Detailed research results will be included in the appendices at the end of this dissertation.
4.1 Findings
K-month
Event: Brexit Event: Pre-Brexit
J-month
3-Month 6-Month 8-Month 3-Month 6-Month 9-Month 12-Month
HPR(3) HPR(6) HPR(8) HPR(3) HPR(6) HPR(9) HPR(12)
x 0.1526 0.2105 0.2892 (0.0668) 0.0308 0.0007 (0.1317)
3-Month y 0.0663 0.0969 0.1190 (0.0708) (0.0425) (0.0574) (0.0246)
Variance (x-y) 0.0863 0.1136 0.1702 0.0040 0.0733 0.0581 (0.1071)
x 0.1135 0.1216 0.1258 (0.0158) (0.3806) (0.4128) (0.4030)
6-Month y 0.0663 0.0969 0.1190 (0.0708) (0.0425) (0.0574) (0.0246)
Variance (x-y) 0.0472 0.0247 0.0068 0.0550 (0.3381) (0.3554) (0.3784)
x 0.1177 0.1485 0.2087 0.0015 0.0428 0.0581 0.0157
9-Month y 0.0663 0.0969 0.1190 (0.0708) (0.0425) (0.0574) (0.0246)
Variance (x-y) 0.0514 0.0516 0.0897 0.0723 0.0853 0.1155 0.0403
x 0.1123 0.1266 0.1755 0.0457 0.1313 0.0872 (0.0855)
12-Month y 0.0663 0.0969 0.1190 (0.0708) (0.0425) (0.0574) (0.0246)
Variance
Figure 7 Overall (x-y) of the
Results 0.0460 0.0297
momentum 0.0565
strategy in 0.1165
the UK stock 0.1738
market. 12 portfolios 0.1446 (0.0609)
of stocks bought
around the Brexit event, and 16 portfolios formed one year prior to Brexit.
Figure 7 illustrates the overall results of this study. The below outlines the key information in
this table:
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Variance (x-y): Simply the difference between the two returns, a positive figure
implies making abnormal profits and vice-versa.
The evidence suggests that all 12 portfolios that used the momentum effect during the Brexit
event all generated abnormal returns, favouring H1, beating the market from 0.68% to
17.02%. The results for the portfolios created for pre-Brexit show that 5 portfolios yielded
negative returns over the periods 3 months / 12 months, 6 months / 6 months, 6 months / 9
months, 6 months / 12 months and 12 months / 12 months. These portfolios underperformed
the market from negative 6.09% and negative 37.84%. These results may favour H0, but 11
portfolios go in favour of H1, outperforming the UK stock market from 0.4% to 17.38%.
These results formed around the two time periods support the alternative hypothesis, which
indicates that the momentum rule can be used to beat the market, as illustrated below:
Brexit
Pre-Brexit
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Figure 8 plots the empirical results of the constructed portfolios and UK stock market
portfolios for the two time periods tested. The following subsections will briefly describe
each formation period.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
From the above figures 9 and 10, which shows the results of the performance of this study on
a 3-month formation period. It can be graphically seen that this portfolio was not efficient in
producing persistent returns, with the pre-Brexit portfolio being inconsistent, and the
Brexit portfolio having a trend from 1-4 month holding periods, and then becoming
inconsistent until month 8.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
With a 9 month formation period, the Pre-Brexit portfolios performed quite well,
outperforming the market most the months, with a few months being consistent with the UK
stock market, however, from month 10, there seems to be drastic underperformance
compared to the market. In the Brexit portfolios, the first month saw the portfolio outperform
the market, and then returns became consistent thereafter, with no major spikes.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Analysing the historical performance over the course of 12 months, the pre-Brexit portfolio
performed well for 6 months after the formation period, but then the portfolio started to
underperform the market thereafter, getting worse in months 7, 10 and 12 respectively. But
the 12 month formation period seemed to serve the Brexit portfolio well, outperforming the
market in months 1-3 until underperforming in month 4, whilst being consistent with the UK
stock market in months 5 and 6, until it started making abnormal profits again in months 7
and 8.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Brexit
Holding Period df mean t-value p-value Std. Deviation
3-month 3 0.05773 6.01610 0.00920 0.01919
6-month 3 0.05490 2.68856 0.07451 0.04084
8-month 3 0.08080 0.09994 0.09994 0.06865
Pre-Brexit
Holding Period df mean t-value p-value Std. Deviation
3-month 3 0.06195 2.66399 0.07608 0.04651
6-month 3 (0.00143) 0.01245 0.99085 0.22888
9-month 3 (0.00930) 0.94153 0.94153 0.23352
12-month 3 (0.12653) 1.41492 0.25203 0.17884
Figure 17 Results for the statistical test applied for testing the results.
Note: df = degree of freedom.
As mentioned in the methodology, to further evaluate and interpret the hypothesis findings,
two basic statistical tests were performed. The first one was the t-statistic (t-value), where this
test usually finds evidence of a significant difference between population means. H0 will be
rejected if the value of the t-statistic is sufficiently large, thus supporting H1. The second test
computed the p-value, which is the probability of attaining a result equal to or more extreme
than what was actually observed. Using a 5% significance level, if the p-value is > 0.05, this
provides evidence to support H0, and if the p-value is < 0.05, then this favours H1.
Referring to the results shown in figure 17, the Brexit portfolios 3 month holding period
shows evidence of momentum, with a t-value of 6.01610 and a p-value of < 0.05, hence
supporting H1. However, this momentum does not seem to stay consistent, as in the 8-month
holding period, a t-value of 0.09994 and a p-value of > 0.05 supports H0, providing no
evidence of a momentum effect during these later months.
On the other hand, with the pre-Brexit portfolios, it can be argued that during the 3-month
holding period, there may be signs of some momentum. However, during later months, from
6-months onwards, the figures all support the null hypothesis, providing evidence that no
momentum effect is present in these months.
Moreover, other than calculating the t-value and p-value, the mean and standard deviation
were also calculated to measure the reliability of the obtained results in the study, measuring
the volatility around the mean. Therefore, for the Brexit portfolios, it can be seen that there is
not much volatility around the mean of the abnormal returns. However, for the pre-Brexit
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
portfolios, there is not much volatility in the 3-month holding period, but for the later months,
the results shows no significance, as there is high volatility around the mean for the holding
periods.
In the literature reviewed, anomalies such as the January effect has been discussed. DeBondt
& Thaler (1985) provide evidence for the existence of the January anomaly in stock returns,
they document stocks earning large extraordinary positive excess returns during January.
Figure 18 illustrates the monthly returns of the post-formation months, and from the graph,
which plots the average monthly returns, it can be seen that for the pre-Brexit portfolios,
abnormal returns are the highest during December, which provides evidence towards a
January effect in the UK stock market, as during the year end, it can be argued that investors
are more active. However, this spike seems to come down as it comes to January, but then
rises again in February. Moreover, with the Brexit portfolios, a clear January effect can be
seen, with the month of January having a high return compared to previous months. Also it is
expected that the Brexit portfolios would be more volatile, but the pre-Brexit portfolio shows
higher volatility in the returns achieved, but this could be down to many factors, such as the
types of stocks which were chosen.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
From the findings above, our observations show a significant January effect, with it being
more obvious in the Brexit portfolios. However, it should be noted that even though there are
signs of a January effect, the returns are not substantial enough to account for the overall
performance of both portfolios, especially not serve as an explanation for the overreaction of
the Brexit portfolios.
The EU Referendum result on 24th June 2016, announcing the unexpected result of Brexit,
had a negative effect on many stocks. Investors withdrew out of the market, which
plummeted the price of stocks, with the pound sterling falling to a 31-year low. However, all
Brexit stocks beat the market, with the use of a momentum strategy. Initially, due to Brexit, it
was thought that it would be very difficult to beat the market, due the volatility of the stock
market, but in all portfolios, the returns were significantly higher than the UK stock market.
Furthermore, when different regions are examined (figure 19), the United Kingdom
(represented by the FTSE 100 index) is up, with a return of 2.56% in just a week. It is also
the best performing region examined, with all other regions suffering small losses, with
developed Europe nursing a 5.08% loss. It appears that Brexit may have just caused a short-
term shock to the capital markets, and its effect has just accelerated existing trends. This
could be due to many factors, such as investors possibly being unhappy with the yields in the
bond markets, and staying invested in stocks with a focus on more defensive sectors. Or
perhaps investors might be thinking that the effects of Brexit, though unclear, are such a long
way off that it should have an insignificant effect on stock prices.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
The empirical results presented in this paper finds evidence for using the momentum strategy
to successfully beat the UK stock market. Tests of market efficiency are usually formed
around an event, which has had a significant effect on all stocks that would be included in a
portfolio. Thus the most significant event which recently happened was the EU Referendum
result announcing Brexit during the summer of 2016. This period was tested, to justify
whether the EMH can be exposed, challenging the theories most basic principle of using past
stock price movements to predict future price movements. Using a formation/holding period
approach, 12 portfolios were constructed, where all portfolios beat the market, generating
abnormal profits between 0.68% and 17.02%. The findings were further supported by t-value
and p-value, which illustrates whether or not the results are economically significant.
Moreover, the standard deviation was also calculated to assess the riskiness and volatility of
the returns around the mean. The results of the Brexit portfolios contradict the suggestions of
Ball & Kothari (1989) that abnormal returns may be due to the relative risks, but our results
show little volatility around the mean. In addition, to add structure and comparability to the
research objective, the same strategy was deployed, testing the market one year prior to
Brexit, creating 16 portfolios. Even though most the portfolios beat the market, which
supports the hypothesis that previous stock momentum can be used to predict future trends to
earn abnormal returns, but doing further statistical tests, it was shown that only for the 3-
month holding period, a momentum was shown, with positive mean returns, with later
months displaying negative mean returns with high volatility. Also, a January effect was also
observed in both testing periods in the UK stock market, similar to the findings of DeBondt
& Thaler (1985). There could be many explanations for this anomaly, with Reinganum
(1983) mentioning that this effect could be due to the tax loss selling in December.
Nevertheless, the spike in stock returns in January is not significant enough to explain the
over-reaction.
The next section will outline the final concluding remarks. Whilst addressing the limitations
of the research, while also suggesting ways in which this research can be improved and be
more accurate and to better reflect the real world condition.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Chapter 5: Conclusion
5.1 Summary
The EMH was developed by Eugene Fama in 1970, with the fundamental idea that in the
environment of efficient markets, information gets reflected instantly into the market. Hence
no single investor should be able to earn excess returns, due to the unpredictability of the
capital markets. However, financial studies and literature over the last twenty years has been
dominated with anomalies, as recent studies now report inefficiencies in the capital markets,
supporting the fact that the EMH may not be a true reflection of the real world. Such studies
which reject the EMH has become the basis of behavioural finance, which states that
investors arent always rational in their decision making. Shiller (1989) comments that
investors take decisions dependent on their emotions, rather than acting on informed and
rational judgements. Many anomalies have been provided with sufficient explanations from
behavioural finance, some of which have been discussed in this dissertation (i.e. cyclical
effects, over-reactions and under-reactions).
The basic assumption of the EMH is that stock price movements are unpredictable, and you
cannot use historical data to forecast future price movements. As mentioned previously in this
paper, the weak-form efficiency of the EMH states that information is already shown in a
stocks price and any price movements are independent to future price changes. However, the
most noted implication of behavioural finance disputes against this basic principle of the
EMH, with many scholars identifying predictable behaviour in the stock markets. It has been
shown in this dissertation that the over-reactions and under-reactions have been subject of
most research, and these trading strategies such as momentum have been extensively tested
by many researchers. Many academics in the field report short-term momentum profits,
which earn abnormal returns, but it should be noted that these trends are due to the average
results of continuous tests during long testing periods, as these patterns do not occur
persistently. Nevertheless, studies such as Banz & Breen (1986) have been able to reduce or
completely diminish any biases from their research, with other scholars adjusting for factors
such as the size-effect.
The research conducted provides evidence towards the momentum strategy being used to
earn excess profits and therefore beating the UK stock market. With all Brexit portfolios
beating the market, and 11 out of 16 pre-Brexit portfolios outperforming the UK stock
market. Also. Further examination of the results identify a January effect in the constructed
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
portfolios, but this effect is not large enough to explain the overreaction. But the main cause
of momentum in the UK stock market is due to momentum effects being a robust feature in
the UK, as mentioned by Liu, Norman & Xu (1999), and with the UK markets showing
evidence of time series patterns and predictability, unlike the Japanese stock market which
was tested by Liu & Lee (2001).
Even though the intention of the empirical research is to be as accurate and detailed as
possible, some characteristics of the study should be taken into consideration. Due to the
limitations of this dissertation, only one event was tested, rather than taking into account
several events. Furthermore, due to time constraints, only 12 portfolios were created for
Brexit, rather than 16, therefore the research was not able to see returns during the 12-month
holding period. Moreover, each portfolio comprises of different stocks in the market, which
means all portfolios may not be similar in capitalisation and volume, which may create
inconsistencies within the results, as each portfolios return is calculated as the average of
each stocks CR in the specific portfolio. Also, with the methodology being based around a
zero-cost approach, the study does not consider real-world implications, such as broker fees
and stamp duty, as these transaction costs would run down the perceived abnormal returns.
Furthermore, the size-effect should also be noted, as all stocks are equally weighted to
simplify the research and analysis of the findings, and there was no control over size.
Zarowin (1990) found that the tendency for small firms to outperform large firms is not due
to over-reaction, but instead it is caused by the difference in size, as a result, the findings of
this study may not be a true reflection of the UK stock market.
Finally, recommendations for future research would be to further test emerging markets, as in
this study, the UK stock market is considered to be developed, thus markets are considered to
be more efficient than emerging markets, as a similar test conducted on emerging markets
may yield dissimilar results. Also, rather than testing the market as a whole, different sectors
and industries (i.e. mining, pharmaceutical etc) should be considered, as results may vary
in specific industries. On a final note the above limitations should also be addressed, for
further research purposes.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
Notes
1
Jenson (1978) uses the symbol t for the information set. And the economic profit is the risk
adjusted returns net of all costs.
2
Malkiel (1992) uses the symbol for the information set. And the economic profit is the
risk adjusted returns net of all costs.
3
Commonly called bear or bull markets, these trends represent the main component of the
Dow Theory. They are long term, typically around 4 years in duration.
4
Referred to as corrections, these movements last only a few months. Typically, a secondary
downward movement in a bull market is referred to as a correction and a secondary upward
movement in a bear market is referred to as a bear trap.
5
Daily fluctuations that are considered random variations. Although these movements are not
essential to the theory, they are plotted to delineate primary and secondary trends.
6
A theory, which moves beyond the definition of the efficient market hypothesis, that states
that new information about any given firm is known with certainty, and is immediately priced
into that company's stock.
7
Contrarian is an investment style that goes against prevailing market trends by buying
poorly performing assets and then selling when they perform well.
8
Decile is a method of splitting up a set of ranked data into 10 equally large subsections. This
type of data ranking is performed as part of many academic and statistical studies in the
finance field. The data may be ranked from largest to smallest values, or vice versa.
9
Researchers such as Bondarenko (2003) and Hogan, Jarrow, Teo & Warachka (2004) have
developed statistical arbitrage trading models.
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Accounting and Finance Dissertation (U21079) Student ID: UP687606
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UK Stock Market Data
Brexit T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb)
3515.45 3653.83 3697.19 3755.34 3768.14 3692.4 3873.22 3858.26 3953.42
Pre-Brexit T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb) K = 9 (Mar) K = 10 (Apr) K = 11 (May) K = 12 (Jun)
3570.58 3652.79 3434.66 3335.92 3484.6 3492.13 3444.26 3335.9 3345.84 3395.19 3421.7 3429.77 3515.45
Brexit Pre-Brexit
Appendix
R1 0.0379 R1 0.0225
R2 0.0117 R2 -0.0635
R3 0.0155 R3 -0.0296
R4 0.0034 R4 0.0427
R5 -0.0205 R5 0.0022
R6 0.0467 R6 -0.0139
HPR(9) -0.0574
HPR(6) -0.0425
48
HPR(3) -0.0708
T = 0 = Brexit (24/06/2016)
Stock price data
Name J = 3 (Mar) J = 2 (Apr) J = 1 (May) T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb)
Smurfit Kappa Group Plc (SKG) 1795 1812 1893 1651 1755 1885 1718 1795 1817 1884 2081 2119
Anglo American PLC (AAL) 552.1 763.4 600.1 726.9 830.5 779.8 967.6 1131 1185 1160 1358 1252.5
Antofagasta PLC (ANTO) 469.4 483.2 429 465.6 500.5 494.7 524 543 689 675 835 807.5
Ashtead Group PLC (AHT) 864 907.5 976 1064 1196 1265 1271 1278 1567 1580 1606 1635
3I Group PLC (III) 456.4 473.6 561.5 547.5 617 614.5 650.5 671 689 704 700 687.5
Blackrock Greater Europe Inv Tst (BRGE) 247 244.5 246.5 255 267.5 272 276.88 287 262 279.5 285 284.12
Blackrock World Mining Trust Plc (BRWM) 218.5 250.5 225.5 270.25 294.5 281 302.25 327.75 327.25 336.5 382 374.5
Compass Group PLC (CPG) 1228 1219 1287 1422 1436 1442 1495 1481 1371 1501 1412 1498
Polar Capital Partners Limited (PCT) 577 566 594.5 625 733 731.5 810.5 795 827 846.5 874.5 936
Spirax Sarco Engineering Plc (SPX) 3640 3415 3450 3740 3983 4334 4495 4412 4271 4184 4305 4449
Formation Holding
R1 0.0086 R1 0.0728
R2 0.0125 R2 0.0402
Student ID: UP687606
R3 0.0468 R3 0.0329
FPR(3) 0.0690 R4 0.0165
R5 0.0219
R6 0.0110
R7 0.0497
R5 0.0006 R5 -0.0449
R6 0.0920 R6 0.0539
FPR(6) 0.2408 R7 -0.0044
49
R8 0.0082
T = 0 = Brexit (24/06/2016)
Stock price data
Name J = 9 (Sep) J = 8 (Oct) J = 7 (Nov) J = 6 (Dec) J = 5 (Jan) J = 4 (Feb) J = 3 (Mar) J = 2 (Apr) J = 1 (May) T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb)
JPMorgan Asian Investment Trust (JAI) 202.88 216.12 215.88 219 215 200 217 211 210.75 237 253 272.12 278 291.5 269.25 273 280.5 296
Melrose Industries PLC (MRON) 49.82 50.2 54.73 54.86 56.04 61.99 67.2 70.36 72.44 80.25 129.02 148 174.5 168.75 183.25 197.75 195.25 210.75
Evraz Plc (EVRE) 72.9 84.75 84.45 73.25 62.35 68.45 90 142 135 137.2 171.2 128 161 205.1 239.8 221.8 223 230.4
John Menzies PLC (MNZS) 365.1 356.93 328.88 366.65 378.25 403.76 419.44 440.2 450.14 481.94 521.26 527 515.08 496.75 525 596 597 589.5
Merlin Entertainments PLC (MERL) 371.6 414.8 412.2 455.5 456 458.8 463.5 431.5 432 440.3 473.2 480.1 439.6 460.8 435.8 448.6 477.1 498.3
holding period.
Acacia Mining PLC (ACAA) 248 193 173.6 180 206.2 248.2 281.3 351.8 345 451.1 559.5 460.7 497.5 518.5 369.9 373.8 430.5 535
Kingspan Group (KSP) 21.6 22.01 24.9 54.9 45 23.28 23.2 23 25.15 19.61 20.8 24.77 24.14 22.1 25.15 25.81 26.89 29.15
Sage Group PLC (SGE) 499.4 545 586.5 603.5 621 596.5 629 592 613 645 712.5 725 738 721.5 657.5 655 613 642.5
Blackrock Greater Europe Inv Tst (BRGE) 236 246.25 246 259 246.25 248.5 247 244.5 246.5 255 267.5 272 276.88 287 262 279.5 285 284.5
North American Income Tst (The) Plc (NAIT) 761.5 820 824 833.5 821 855 889 899 899 955 1070 1081 1090 1124 1183 1254 1232 1245
Formation Holding
R1 0.0408 R1 0.1138
Student ID: UP687606
R2 0.0007 R2 -0.0144
R3 0.0481 R3 0.0181
R4 0.0022 R4 0.0236
R5 0.0181 R5 -0.0350
R6 0.0487 R6 0.0404
R7 0.0231 R7 0.0080
R8 0.0069 R8 0.0440
50
T = 0 = Pre Brexit (24/06/2015)
Stock Market Data
Name J = 3 (Mar) J = 2 (Apr) J = 1 (May) T = 0 (Jun) K = 1 (Jul) K = 2 (Aug) K = 3 (Sep) K = 4 (Oct) K = 5 (Nov) K = 6 (Dec) K = 7 (Jan) K = 8 (Feb) K = 9 (Mar) K = 10 (Apr) K = 11 (May) K = 12 (Jun)
Lamprell Plc (LAM) 119.5 140.75 152.5 151 146 132.75 114 120 107 99.5 83 98 91.75 86.75 75.75 71.25
Amerisur Resources Plc (AMER) 30 34 35.75 36.5 33.5 26.25 25 28 25 24.5 25 27.75 29 27.5 27 26.5
Dechra Pharmaceuticals PLC (DPH) 1007 1023 1029 983 984.5 950.5 939 969.5 983 1093 998 1144 1206 1106 1177 1172
Greencore Group (GNC) 265.14 291.7 270.73 258.23 260.2 244.49 224.49 248.36 277.72 291.37 319.74 312.83 308.39 296.72 283.48 252.88
Telecom Plus (TEP) 870 767 814 990 1214 1114 1117 1051 1131 1071 1010 850 920.5 931 1032 1042
Centrica PLC (CNA) 253 255.4 277.6 263.8 266.5 243.2 229.2 226.1 218.1 218.1 204.8 208 227.7 238.4 203.8 225.5
Go-Ahead Group (GOG) 2330 2470 2655 2634 2550 2531 2456 2425 2628 2669 2449 2580 2650 2565 2565 1956
Micro Focus International (MCRO) 1181 1257 1324 1361 1398 1305 1203 1256 1283 1595 1386 1475 1570 1529 1630 1613
Intermediate Capital Group PLC (ICP) 505.46 529.56 601.34 551.64 583.81 534.28 516.77 566.3 613.32 627.33 582.3 578.3 618.82 614.32 667.85 490.56
Interserve (IRV) 580 579.5 620 660.5 645.5 584.5 574 556.5 531 520.5 466.4 435.2 433.8 427.3 334.2 260.25
Formation Holding
R1 0.0281 R1 0.0238
R2 0.0555 R2 -0.0543
R3 0.0139 R3 -0.0362
FPR(3) 0.1003 R4 0.0065
R5 0.0449
R6 0.0502
Student ID: UP687606
R7 -0.0910
R8 0.0240
R9 0.0431
R10 -0.0299
R11 0.0218
R12 -0.1246
R9 -0.0481
R10 -0.0197
R11 0.0240
51
R12 0.0129
HPR(12) -0.4030
HPR(9) -0.4128
HPR(6) -0.3806
HPR(3) -0.0158
R4 0.0710 R4 0.0403
R5 0.0390 R5 -0.0065
R6 0.0078 R6 0.0074
R7 0.0026 R7 -0.0400
R8 0.0307 R8 0.0326
R9 0.0009 R9 0.0235
FPR(9) 0.2361 R10 -0.0270
R11 0.0325
R12 -0.0446
9
6
3
9
6
3
9
6
3
12
12
12
J-month
J-month
Expected value:
Expected value:
0
0
HPR(3)
0.04600
0.05140
0.04720
0.08630
HPR(6)
HPR(8)
0.02970
0.05160
0.02470
0.11360
0.05650
0.08970
0.00680
0.17020
Student ID: UP687606
Degrees of freedom:
Standard Deviation:
Average value:
p-value:
t-value:
Degrees of freedom:
Standard Deviation:
Average value:
p-value:
t-value:
Degrees of freedom:
Standard Deviation:
Average value:
p-value:
t-value:
3
3
0.04084
0.07451
2.68856
0.05490
0.06865
0.09994
2.35400
0.08080
0.01919
0.00920
6.01610
0.05773
Accounting and Finance Dissertation (U21079) Student ID: UP687606
Expected value: 0
J-month HPR(3)
3 0.00400 Average value: 0.06195
6 0.05500
9 0.07230 Degrees of freedom: 3
12 0.11650 t-value: 2.66399
p-value: 0.07608
Standard Deviation 0.04651
Appendix 13: Pre-Brexit 3-month holding period statistical test data
Expected value: 0
J-month HPR(6)
3 0.07330 Average value: -0.00143
6 -0.33810
9 0.08530 Degrees of freedom: 3
12 0.17380 t-value: 0.01245
p-value: 0.99085
Standard Deviation 0.22888
Appendix 14: Pre-Brexit 6-month holding period statistical test data
Expected value: 0
J-month HPR(9)
3 0.05810 Average value: -0.00930
6 -0.35540
9 0.11550 Degrees of freedom: 3
12 0.14460 t-value: 0.07965
p-value: 0.94153
Standard Deviation 0.23352
Appendix 15: Pre-Brexit 9-month holding period statistical test data
Expected value: 0
J-month HPR(12)
3 -0.10710 Average value: -0.12653
6 -0.37840
9 0.04030 Degrees of freedom: 3
12 -0.06090 t-value: 1.41492
p-value: 0.25203
Standard Deviation 0.17884
Appendix 16: Pre-Brexit 12-month holding period statistical test data
53