When we download the ten years monthly stock price form the FTSE100 during the period 2005 to 2015 from yahoo finance, we calculate the stock returns following the time series. We have four formation periods and holding periods, each equal to 3, 6, 9, 12months, so totally we have 16 strategies. Firstly, calculate returns for a set of stocks for the setting period (3, 6, 9, 12 months), then rank the returns from highest to lowest, now stocks are ranked in ascending order on the basis of their returns in the past J month, here, J refer to the formation period which set to 3,6,9 and 12 months. Secondly, sorting these returns and choose the top batch stocks labelled as winners’ portfolio and bottom batch as losers’ portfolio, the stocks are equally-weighted at the …show more content…
When R ̅winner- R ̅loser > 0, which refer to past winners outperform past losers, it suggest that the momentum strategy is profitable, if it also significantly different from zero, we can reject the weak form of EMH, here we assuming transaction cost have no effect on the R ̅Winner-loser . Here, we need a formula to test the significance of returns on these strategies which refer