Utilising Momentum Trading Strategy on the UK Stock Market: Challenging Efficient Market Hypothesis (2017)

A number of studies have illustrated that stock returns may be predictable through implementing a momentum trading strategy, which contradicts the whole concept of the Efficient Market Hypothesis. This dissertation will discuss the Efficient Market Hypothesis and focus on its challenges in the face of behavioural finance. In addition, empirical research is conducted to test whether a momentum strategy can be implemented to successfully beat the market.

This dissertation draws on the framework developed by Jegadeesh and Titman (1993), while also taking ideas from other relevant scholars in the field, and analyses the monthly returns generated from the momentum strategy used, examining whether the returns in each constructed portfolio is greater than the return of the UK stock market (FTSE All-Share market index) for the period 2016, based around Brexit, an event which had an influence on the stock market as a whole, and construct another set of portfolios one-year prior to the event, to act as a control for comparability and to test validity of the momentum strategy being used to generate excess returns.

From the empirical data, it is seen that in the Brexit portfolios, every portfolio beat the market, however for the pre-Brexit portfolio, a few portfolios under-performed the market, with the majority beating the market. Although the two time periods tested had dissimilar results, this dissertation can still confirm that the use of the momentum strategy can be used to predict future returns, and manage to earn abnormal returns.

This dissertation is inspired by the desire to gain a greater understanding of the financial markets, through implementing momentum trading strategies and examining anomalies to exploit any market inefficiencies. The research is motivated by a strong personal interest in the general topic areas and perceived gaps in existing literature. Moreover, financial market efficiency is the central importance to practitioners, investors, corporations and regulators, with financial theory being based around the belief that financial agents and markets are rational.

Furthermore, investors depend greatly on strategies which observe stock market behaviour, a key focus of this research. Also, with the continuous success of individuals such as George Soros and Warren Buffett, they represent the most immutable contradiction of market efficiency theories, that returns are unpredictable.


  • 10,000 words – 42 pages in length
  • Excellent use of literature
  • Excellent analysis of subject area
  • Well written throughout
  • Ideal for finance and accounting students

1: Introduction
Background to the study
Rationale
Research objectives
Importance of the study
Structure of the dissertation

2: Literature Review
An introduction to the Efficient Market Hypothesis (EMH)
Testing the efficient market hypothesis
Testing the weak-form efficiency
The Filter approach
The Dow Theory
Testing the semi-strong form efficiency
Event Studies
Stock Splits
Testing the strong-form efficiency
Anomalies
The calendar effect
The January effect
Behavioural Biases
Under-reactions, over-reactions and contrarian strategy
Momentum trading

3: Methodology
Data
Time period to test
The United Kingdom’s withdrawal from the European Union (Brexit)
One year prior to United Kingdom’s withdrawal from the European Union (pre-Brexit)
Formation Period and Holding Period returns
The Zero-Cost Trading Strategy
Validity test
Strategies characteristics
Hypothesis Test
Null Hypothesis (H0)
Alternative Hypothesis (H1)

4: Results and Analysis
Findings
Results for 3-months formation period
Results for 6-months formation period
Results for 9-months formation period
Results for 12-months formation period
Testing the validity of the research results
The January Effect
Effect of the EU Referendum on the test results
Summary of research results

5: Conclusion
Summary
Limitations of the study and suggestions for further research

Bibliography

Appendix

Momentum Trading Strategy UK Stock Market Dissertation
Momentum Trading Strategy UK Stock Market Dissertation

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