Testing the profitability of the momentum investment strategy in Istanbul Stock Exchange

Over the past 40 years, testing whether the market is efficent has been an important subject of various studies. According to the efficent market teory, investors cannot achieve returns in excess of average market returns, given the information at the time the investment is made. Contrary to efficent market hypothesis, behavioral finance approach, argues that investors behave irrationally because of psychlogical factors and therefore underreaction or overreaction in markets can be observed. The presence of ?underreaction or overreaction?, may conflict with the efficient market hypothesis. Investors in different markets can achive higher returns by taking advantage of underreaction or overreaction without bearing any additional risks. Momentum strategy is based on underreaction and the main assumption of this strategy suggests that stocks with strong past performance will continue to rise further in the following three or twelve months.This study examines the profitability of momentum strategies implemented on ISE. Study sample of the sample is constructed from the stocks traded in National Market of Istanbul Stock Exchange (ISE) from July 2000 to June 2010. In the study, the methodology (J month/K month) employed by Jegadeesh ve Titman (1993) is used . K is the holding period and J is the formation period. The portfolios named (J3), (J6), (J9), (J12) ve (K3), (K6), (K9), (K12) are determined. Also, performance of momentum strategy is tested with t test, Jensen method and Fama-French three factor model.The results for 3, 6 and 9-month formation periods, momentum strategy appears to have a poor performance. However for 12-month formation period, momentum strategy seems to be profitable. This means that, if an investors has a chance to invest in the stocks that have higher performance in the past 12-month period and sell the ones whose prices are falling, they may achive significant profits acording to the momentum strategy.