Momentum universe shrinkage effect in price momentum

TL;DR

This paper investigates how the momentum universe shrinkage to submarkets like KOSPI 200 affects the performance of momentum strategies in the Korean stock market, revealing that certain submarkets and investor behaviors influence returns.

Contribution

It provides new insights into the impact of universe selection and investor trading patterns on momentum strategy effectiveness in Korea.

Findings

Some submarkets yield higher momentum returns.

Large-size companies like KOSPI 50 hinder momentum performance.

Foreign investor trading patterns contribute to the universe shrinkage effect.

Abstract

We test the price momentum effect in the Korean stock markets under the momentum universe shrinkage to subuniverses of the KOSPI 200. Performance of the momentum strategy is not homogeneous with respect to change of the momentum universe. It is found that some submarkets generate the higher momentum returns than other universes do but large-size companies such as the KOSPI 50 components hinder the performance of the momentum strategy. The observation is also cross-checked with size portfolios and liquidity portfolios. Transactions by investor groups, in particular, the trading patterns by foreign investors can be a source of the momentum universe shrinkage effect in the momentum returns.