Essays on the effect of exogenous factors on price momentum profit

The main aim of this thesis is to capture the exogenous factors such as industry structure, financial report tone and terrorism which have strong impact on price momentum profit. We believe that the intrinsic value which originates from the time varying characteristic is not the only source of “winner minus loser” excess return. The operational environment also shows the essential explanatory power on momentum effect, however, this area has been ignored in studies in finance. In this thesis, three empirical chapters are developed to explore the key drivers of momentum in firm level, industry level and market level.

The Chapter 1 focuses on industry hierarchy to explore the effect of industry performance on price momentum profit. This linkage differs from industry to industry, and country to country. We collect data from international stock market which includes G7 and BRICS countries from 2000 to 2018 in monthly basis to build empirical models. Our findings indicate that industry performance possesses forecasting power on price momentum profit in one month time window. That effect differs from industry to industry and country to country.

The main aim of Chapter 2 is to quantify the language in financial reports and explore its impact on price momentum profit. We believe that the valuable fundamental information containing in financial reports drives investor sentiment which influences the momentum effect in the market. The results show that during announcement time, the tone of financial disclosure has positive relationship with momentum profit which leads to replacement effect between those two factors. This effect is stronger in quarter reports (10Q) than annual reports (10K). Besides that, the moderator impact of late filing is also considered to emphasize that failing to meet the deadline of SEC regulation raises the negative sentiment among investors. Therefore, the magnitude of financial report tone effect on short run return continuation is reduced. However, this outcome is witnessed in late 10K filings, while there is no significant evidence in late 10Q filings.

The purpose of chapter 3 is to investigate the impact of terrorism on the price momentum profit. We focus on the difference of momentum behaviour before and after event which is conducted with proximity effect. The empirical findings confirm the negative association between geographical uncertainty and short run return continuation. However, there is variation of impact between event targets which emphasizes the essential position of business-related events. We also examine the duration of terrorism effect to find out that the financial consequences of terrorist attacks endure only one month before momentum revert to the higher premium.

We employ several econometric models and techniques to ensure the reliability and accuracy of the findings. Our empirical results indicate a strong linkage between those exogenous factors and the performance of long short position strategy which amplifies the superior stance of behavioural explanation of stock price momentum phenomenon. Our findings also provide momentum investors a guideline to select appropriate stocks and manage their portfolio during the uncertain period in the market. What kind of impact will you expect on policy makers?