Company size, trading activity and liquidity as a determinants of cross-sectional momentum trading strategy on Russian stock market

Abstract

Momentum-effect has many interpretations in the practice of investing and in understanding of anomalies in asset prices. We consider a Cross-Sectional momentum effects and the corresponding two medium-term (3 months or more) trading strategies that are different from the trend following rules for individual assets. We tested four  hypothesis deals with cross-sectional momentum effect on the Russian stock market and the possibility of building a self-financing (long-short) trading strategy at three time horizon (stock market growth from 2004 until mid- 2008, financial crisis and post-crisis periods). It is shown that for the Russian market cross-sectional momentum strategy with partly rebalanced portfolio maximizing portfolio return (134 stocks listed from 2004 to 2014 in the few Russian stock exchanges) should be based on the three-month formation period and three-month holding period periods (3/1/3). We have identified elements of profit-maximizing momentum strategy: three time windows and determinants of assets. Monthly average return of arbitrage strategy is estimated at 1.5 % for 134 common shares. Implementation of the strategy for the post-crisis period does not allow to maximize profit. For 6 month and more investment windows it gets the advantage of reverse  strategy (opening long positions in stocks with low investment results and short position for assets with high relative returns). Fundamental parameters of the issuer (size of companies like market capitalization and  two measures of liquidity (trading activity and transaction costs like bid-ask spread)) are significant to maximize portfolio performance (we prove the growth of monthly average return ranging from 1.5 to 2.5 %). We find that size and liquidity control momentum strategy can earn positive profits in Russian stock market, larger than naïve momentum.