Momentum Crashes in Sweden : NASDAQ OMX Stockholm from a Momentum Perspective

Abstract: Momentum, or the basic idea of the momentum effect in finance, is that there is a tendency for rising asset prices to continue rising, while the falling prices continue to fall. As such, a momentum strategy is based on the idea that previous returns will predict future returns. In order to follow this line of thought, a momentum strategy is generally based on buying past winners and taking short positions in past losers. This quantitative study addresses the phenomenon of momentum crashes, which is a moment in time when a momentum strategy fails, and past losers outperform past winners. In our study we are setting out to study the momentum crash phenomenon during the years of 2006-2012 on NASDAQ OMX Stockholm, focusing specifically on the Small- and Large Cap segments. As we intend to explore the concept of momentum crashes as thoroughly as possible, we will also be researching momentum itself during this time period, as these two concepts are inevitably intertwined. In order to do this, we will be applying commonly used portfolio construction methods used in previous momentum research. These portfolios will be based on past winners and past losers, and their performance will then be tracked for different lengths of time, which will allow us to identify points in time where momentum crashes have occurred. What we found in our research was that, while we gathered data indicative of momentum trends during our chosen time period, we could not prove that momentum existed to any statistically meaningful degree. As for momentum crashes, we identified many different points in time where the past-loser portfolios outperformed the past-winner portfolios, thus resulting in negative winner-minus-loser portfolios and momentum crashes. The most interesting aspect of these findings was that the highest frequencies of momentum crashes were found in the years of 2008 and 2009, where we made the most negative winner-minus-loser portfolio observations. This finding is in line with similar research on other populations, as momentum crashes are theorized to occur at a higher frequency during times of market stress and high volatility. Furthermore, we also made some interesting connections between our findings and behavioral finance; we identified certain patterns which could be indicative of a relationship between the two. As for the research gap and the ultimate contribution of this study, we have increased the knowledge, understanding and awareness of momentum crashes in Sweden, and we have shown during which times these are likely to occur in a Swedish context. Additionally, we have also increased the general knowledge of momentum by exploring it from a Swedish perspective.