The role of return dispersion in momentum profitA study in the Thai Stock Market

Abstract

This study investigates the influence of market return dispersion on the profitability of momentum investment strategies within the Stock Exchange of Thailand (SET). Employing an analytical approach, the research identifies a significant and persistent pattern of return dispersion in the Thai stock market. This pattern is characterized by a strong positive correlation between the dispersion of returns in a given period and the subsequent period, as confirmed by a significant autoregressive coefficient and the Dickey-Fuller test. Additionally, the study explores the performance consistency of top-performing stocks during periods of high and low dispersion, using transition matrices and the Chi-squared test. The results indicate a notable stability in the probability of stocks maintaining their performance rankings, regardless of market return dispersion. Furthermore, the study assesses the effectiveness of various momentum strategies – Traditional Momentum, Weighted Dispersion Momentum, and High Dispersion Momentum – considering the return dispersion factor. The Weighted Dispersion Momentum strategy emerges as the most effective, offering the highest returns with the lowest volatility. However, the analysis reveals that during the period under examination, investing solely in the SETTRI would have been the most advantageous strategy. This finding underscores the significance of evaluating momentum strategies against benchmark indices to determine their relative effectiveness. The study concludes that integrating the concept of market return dispersion into momentum strategies can significantly enhance portfolio performance in the Thai stock market, but this approach may not always surpass the returns of a well-established benchmark like the SETTRI.