SIZE, VALUE AND MOMENTUM EFFECTS: EVIDENCE FROM THE TOKYO STOCK EXCHANGE
Abstract
Our empirical study investigates whether size, market to book value
(MV/BV) and momentum (trend-following) effects are priced in The Tokyo Stock Exchange
(TSE), 1125 traded stocks, whose market capitalization exceeds $300 million. We
compare different window lengths for momentum strategy (past 1, 3, 6, 9 and 12 months
excluding the most recent) and the ratio of current stock price to 52-week high for testing
portfolio pricing with four-factor models. Our trend-following investment strategy based on
buying the stocks with the highest return and selling securities with the lowest. We find that
stock price momentum (past 3 month return), value and size have significant impacts on
Japanese stock returns. Momentum strategy «Long winner» for the last three months is
the most profitable in comparison with strategies based on 1-, 6-, 9-, 12-month past return
and the ratio of current stock price to 52-week high. At the same time we show that the
most effective holding period of a portfolio based on momentum strategy is four months.
Investors require a premium for higher risks associated with small size, low MV /BV
and the stock price momentum strategy. In each size or momentum quantile, a portfolio
with a low MV/BV has low mines high (LMH) coefficients higher than a portfolio with a high
MV/BV. Controlling for MV/BV or momentum, small mines big (SMB) coefficients increase
when size decreases. Similarly, in each size or value subgroup the momentum coefficients
are positive for winners and negative for losers. Overall, investors should combine
value/size and momentum strategies (with 3 month formation period and 4 months holding
period) in order to outperform the Japanese stock market.
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