Prepared by Derek Song German Hurtado Mustafa Jalil Qureshi Rodrigo De La Maza Fuqua School of Business Duke University Content Introduction Why the Insurance Industry Methodology applied ID: 816083
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Slide1
Momentum InvestmentInternational Finance – Finance 663
Prepared by:
Derek Song
German Hurtado
Mustafa
Jalil
Qureshi
Rodrigo De La
Maza
Fuqua School of Business, Duke University
Slide2ContentIntroduction
Why the Insurance Industry?
Methodology applied
Results and AnalysisConclusions
Prepared by:
Derek Song, German Hurtado, Mustafa Jalil Qureshi, Rodrigo De La Maza
Momentum Investment - Finance 663
Slide31. Introduction
What is Momentum Strategy?
Tendency of investments to persist in their current performance
Go long on top performing stocks and short on bottom performing stockShould not exist in the Modigliani and Miller world of perfect marketPlausible Explanations:Reward for the excessive Risk taken by the InvestorReward from herd
mentality, lead lag, over under reaction
Momentum Investing
Prepared by:
Derek
Song, German Hurtado, Mustafa
Jalil
Qureshi, Rodrigo De La Maza
Momentum Investment - Finance 663
Slide42
.Industry
Criteria:
Mature Industry
Ease of Data Availability
No seasonal Impact
Geography (Market); Developed
Low Volatility / Market Fundamental
Hypothesis:
“Momentum Investment in Insurance Industry will lead to XX% returns “
Insurance
Prepared by:
Derek
Song, German Hurtado, Mustafa
Jalil
Qureshi
, Rodrigo
De La
Maza
Momentum Investment - Finance 663
Metals and Mining
Beverage
Health Care
Banking
Retail
Bank
Electronics
Insurance
R.E.I.T
Slide5Formation Period “F”
(Winners)
(Losers)
Slide6Formation Period “F”
Holding Period “H”
+
-
)
(
Slide7Return(+
-
,
) > 0
Slide8F x H = 3 x 3 (n = 20 months)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
(n – (F + H)) portfolios
Slide91
2
3
4
5
6
7
8
9
10
11
12
13
14
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
R
Slide10AR (
)
,
AR (
)
,
AR (
)
,
AR (
)
,
AR (
)
,
AR (
)
,
AR (
)
,
AR (
)
,
AR (
)
,
AR (
)
,
AR (
)
,
AR (),
AR (
),AR (
),
AR (
),
Slide11CAR1(
)
,
CAR2(
)
,
CAR3(
)
,
CAR3(
)
,
CAR1(
)
,
CAR2(
)
,
CAR3(
)
,
CAR3(
,
CAR1(
)
,
CAR2(
)
,
CAR3(
)
,
CAR3(
,
CAR1(
)
,
CAR2(
),
CAR3(),
CAR3(
,
CAR1(),
CAR2(
),
CAR3(),
CAR3(
,)
)
)
)
MCAR
3
Slide121
2
3
4
5
6
7
8
9
10
11
12
13
14
R (
)
,
R (
)
,
R (
)
,
R (
)
,
R (
)
,
R (
)
,
R (
)
,
R (
)
,
R (
)
,
R (
),
R (
),R (
),
R (
),
R (
)
,
R (
)
,
MAR
1
MAR
2
MAR
3
Slide131) MCARH > 0
TESTS:
2) If, MCAR
H > 0; find Optimal H3) Test of Statistical Significance
4) Analyze MARs
Slide143. XXXXXX
XXX
XXX
XXXXXXXXX
Overview
Prepared by:
Derek
Song, German Hurtado, Mustafa
Jalil
Qureshi, Rodrigo De La Maza
Momentum Investment - Finance 663
Slide154. Results and AnalysisThe will indicates
how much the portfolios including winner and loser portfolios earn on average during test holding period.
We expected to prove our hypothesis that
MCARw – MCARl > 0, and based on the T-Stats results shown below for various MxN strategies, we concluded that our hypothesis was correct.
Mean Cumulative Average
Returns - MCAR
Prepared by:
Derek
Song, German Hurtado, Mustafa
Jalil Qureshi, Rodrigo De La
Maza
Momentum Investment - Finance 663
Test
if
Winners – Losers
> 0
> 2
Also, we found particularly interesting the value seen in the 6X12 strategy, whereas the T-Stats value reached the highest value at 6.773 while providing the highest Mean/Variance ratio.
Statistics
of the Return
MCAR
w
-
MCARL of p
ortfolio applying the
MxN Momentum Investment Strategy
Slide164. Results and Analysis
Mean Cumulative Average
Returns - MCAR
Prepared by:
Derek
Song, German Hurtado, Mustafa
Jalil
Qureshi
, Rodrigo De La Maza Momentum Investment - Finance 663
But, after analyzing all the historical data,
which
strategy is the
optimal?
We tested six momentum investment strategies with different formation periods (
3 or 6 months
) and holding periods (
3, 6, 12 months
)
.
We
can
conclude
that the longer formation period, the higher investment return. If we annualize the returns of all portfolios with different holding periods, we can find that, generally, the 6x12 strategy with 28.9% annualized return gives the highest value with the respective of Mean/Variance of 0.603.
Annualized returns of portfolios with various holding periods
Slide174. Results and Analysis
Mean Cumulative Average
Returns - MCAR
Prepared by:
Derek
Song, German Hurtado, Mustafa
Jalil
Qureshi
, Rodrigo De La Maza Momentum Investment - Finance 663
Although
the accumulative returns of both loser and winner portfolio
grows
throughout the 12-month period, the pace of increase slows down
during some periods. Even
in the
2
nd, 10th and 12th months, the MCAR of winner portfolio goes down. It may also be observed that MCAR of loser portfolio almost remains negative except in 6th and 10th month. It is important to note that the
range of data we are testing covers two recessions and two rebounds. Thus, it
becomes clear that regardless of the market direction, the difference of winner and loser remains positive and growing.
MCAR of winner and loser portfolio for the testing period for 6x12 trading strategy
Slide184. Results and Analysis
Mean Average
Returns - MAR
Prepared by:
Derek
Song, German Hurtado, Mustafa
Jalil
Qureshi
, Rodrigo De La Maza Momentum Investment - Finance 663
The
MAR of
a portfolio denotes the mean of the average return of the portfolio in the
t
th
month
of the testing period. The MAR test
helps identify:Whether it is the winner portfolio or loser portfolio that runs outs of momentum and ifThe returns of which portfolio (winner or loser) are reversed in the first instance.
We calculated the difference between MARW and MARL. We can see that the overall MAR of our portfolios are positive in each month of
the holding period. The mean of monthly returns is 2.4% and the standard deviation is 1.86%. The skewness is
1.39, which means we have a more positive returns greater than 2.4%.
MARW minus MARL for 6x12 Strategy
Slide19ConclusionsWe validated the hypothesis about
Momentum
Investment
: Assets that perform well over a 3 to 12 month period tend to continue to perform well into the future.Momentum profits provide fund managers with an excellent opportunity to create beta-neutral, superior-return portfolios. The insurance industry in the U.S is a pretty good investment target in order to implement this long-short momentum investment strategy. The average accumulative return during 12-
months using this trading strategy is about 28.92%
.This figure is better than the return obtained using a passive investment strategy investing index or ETF.The optimal formation period in this industry during 2001 – 2012 is
6 months
and holding period is
12 months
. Finally, we also showed that Momentum Investment may work well in case markets are positive or negative trending.
Prepared by:
Derek
Song, German Hurtado, Mustafa
Jalil
Qureshi
, Rodrigo
De La Maza Momentum Investment - Finance 663