Summary of – Momentum, reversals and liquidity: Indian evidence

Document Type

Article

Abstract

The role of liquidity in momentum strategies has gained increasing attention in recent years. Liquidity, often measured by the turnover ratio, can potentially enhance or diminish momentum effects, yet its impact in the Indian context remains understudied.

Research Goals and Hypotheses

This paper addresses three interesting questions. First, we explore whether price momentum exists for equities listed on the Bombay Stock Exchange (BSE). Second, we examine whether liquidity (measured by turnover ratio) enhances the momentum effect. Third, we examine whether momentum profits exhibit reversals for illiquid stocks.

Methodological Approach

Collated a large sample of 3956 stocks for the period 2000 to 2021

Results and Discoveries

The study establishes three key results. First, we find evidence of significant price momentum (intermediate and long-term) for equities listed on the BSE. Second, when conditioned on liquidity, we find that the momentum returns (short, intermediate, and long-term) are more significant for the most liquid portfolio and exhibit persistence for the next 12 months. Third, although we document evidence of short and intermediate-term reversals among the most illiquid portfolios, we fail to find evidence of persistence. Our results continue to hold after controlling for risk factors related to market premium, firm size, value, and a host of macroeconomic indicators. Taken together, our paper highlights the role of liquidity in amplifying the momentum effect in the Indian market.

Citation to the base paper:

Chui, A., Ranganathan, K., Rohit, A., & Veeraraghavan, M. (2023). Momentum, reversals and liquidity: Indian evidence. Pacific-Basin Finance Journal, 82, 102193. https://doi.org/10.1016/j.pacfin.2023.102193

Publication Date

2023

Recommended Citation

Chui, A., Ranganathan, K., Rohit, A., & Veeraraghavan, M. (2023). Momentum, reversals and liquidity: Indian evidence. Pacific-Basin Finance Journal, 82, 102193. https://doi.org/10.1016/j.pacfin.2023.102193

Publication Date

2023

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