The momentum effect in the Tunisian stock market: Risk hypothesis vs. underreaction hypothesis
The purpose of this paper is to examine two controversial explanations for the momentum in the Tunisian stock market: the risk hypothesis and the underreaction hypothesis. To address the risk issue, the five-factor model of Fama and French (2015) was used to estimate the momentum profits. We found a...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Elsevier
2020-06-01
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| Series: | Borsa Istanbul Review |
| Subjects: | |
| Online Access: | http://www.sciencedirect.com/science/article/pii/S221484502030003X |
| _version_ | 1828382588726673408 |
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| author | Ramzi Boussaidi Ghada Dridi |
| author_facet | Ramzi Boussaidi Ghada Dridi |
| author_sort | Ramzi Boussaidi |
| collection | DOAJ |
| description | The purpose of this paper is to examine two controversial explanations for the momentum in the Tunisian stock market: the risk hypothesis and the underreaction hypothesis. To address the risk issue, the five-factor model of Fama and French (2015) was used to estimate the momentum profits. We found a strong evidence of risk-adjusted momentum profits indicating that the risk cannot explain the momentum effect. To test the underreaction hypothesis, an event study was performed to track the market reaction to the information content of earnings before, on and after earnings announcement. We found that good earnings news are followed by positive abnormal returns; while bad earnings news are followed by negative abnormal returns over 12 months after the announcement date. Consistent with the underreaction hypothesis, these findings indicate that the market slowly adjusts in the same direction to the unexpected earnings. To control for this effect, we extended the five-factor model to include a factor based on unexpected earnings. We found that the momentum profits are captured by a zero-investment portfolio that is short on the portfolio with the lowest unexpected earnings and long on the portfolio with the highest unexpected earnings. |
| first_indexed | 2024-12-10T04:34:31Z |
| format | Article |
| id | doaj.art-c9106742c3c947d2b1d4f35cae5ca6ad |
| institution | Directory Open Access Journal |
| issn | 2214-8450 |
| language | English |
| last_indexed | 2024-12-10T04:34:31Z |
| publishDate | 2020-06-01 |
| publisher | Elsevier |
| record_format | Article |
| series | Borsa Istanbul Review |
| spelling | doaj.art-c9106742c3c947d2b1d4f35cae5ca6ad2022-12-22T02:02:03ZengElsevierBorsa Istanbul Review2214-84502020-06-01202178195The momentum effect in the Tunisian stock market: Risk hypothesis vs. underreaction hypothesisRamzi Boussaidi0Ghada Dridi1Finance and Insurance Department, College of Business, University of Jeddah, Saudi Arabia; Department of Management, FSJEGJ, Université de Jendouba, Tunisia; Corresponding author. Department of Management, FSJEGJ, Université de Jendouba, Tunisia.Faculty of Law, Economics and Management of Jendouba, TunisiaThe purpose of this paper is to examine two controversial explanations for the momentum in the Tunisian stock market: the risk hypothesis and the underreaction hypothesis. To address the risk issue, the five-factor model of Fama and French (2015) was used to estimate the momentum profits. We found a strong evidence of risk-adjusted momentum profits indicating that the risk cannot explain the momentum effect. To test the underreaction hypothesis, an event study was performed to track the market reaction to the information content of earnings before, on and after earnings announcement. We found that good earnings news are followed by positive abnormal returns; while bad earnings news are followed by negative abnormal returns over 12 months after the announcement date. Consistent with the underreaction hypothesis, these findings indicate that the market slowly adjusts in the same direction to the unexpected earnings. To control for this effect, we extended the five-factor model to include a factor based on unexpected earnings. We found that the momentum profits are captured by a zero-investment portfolio that is short on the portfolio with the lowest unexpected earnings and long on the portfolio with the highest unexpected earnings.http://www.sciencedirect.com/science/article/pii/S221484502030003XG11G14 |
| spellingShingle | Ramzi Boussaidi Ghada Dridi The momentum effect in the Tunisian stock market: Risk hypothesis vs. underreaction hypothesis Borsa Istanbul Review G11 G14 |
| title | The momentum effect in the Tunisian stock market: Risk hypothesis vs. underreaction hypothesis |
| title_full | The momentum effect in the Tunisian stock market: Risk hypothesis vs. underreaction hypothesis |
| title_fullStr | The momentum effect in the Tunisian stock market: Risk hypothesis vs. underreaction hypothesis |
| title_full_unstemmed | The momentum effect in the Tunisian stock market: Risk hypothesis vs. underreaction hypothesis |
| title_short | The momentum effect in the Tunisian stock market: Risk hypothesis vs. underreaction hypothesis |
| title_sort | momentum effect in the tunisian stock market risk hypothesis vs underreaction hypothesis |
| topic | G11 G14 |
| url | http://www.sciencedirect.com/science/article/pii/S221484502030003X |
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