The analysis of enhanced momentum strategies in the Stock Exchange of Thailand
Authors:   , Kamolsawat Chayakon 
Published: September 2023

The purpose of this study is to investigate the effectiveness of momentum strategies in investment portfolios, a well-known anomaly in the efficient market hypothesis, by portfolio are constructed by long winners and short losers. Specifically, the study focuses on the use of volatility to enhance momentum strategies in the Stock Exchange of Thailand from January 2013 to December 2022. The enhanced momentum strategies under investigation vary the portfolio weight with volatility and can be classified into constant volatility-scaled, constant semi-volatility-scaled, and dynamic-scaled approaches. The research aims to achieve two main objectives. Firstly, to analyze the potential of the enhanced momentum strategies by comparing the average return, the Sharpe ratio, and maximum drawdown, while also taking into account transaction costs as proxied by round-trip costs. Secondly, to examine the time-varying characteristics of these approaches and identify sub-periods within momentum crashes, which are associated with consistent negative returns. These periods typically occur during panic states following market declines and coincide with market rebounds. Additionally, asymmetry in bull and bear markets is analyzed.

The findings of this study demonstrate that enhanced momentum strategies exhibit superior performance compared to the standard momentum approach, both from a statistical and economic standpoint. These volatility-managed portfolios effectively scale and time the volatility of the standard portfolio, leading to improved returns and Sharpe ratio. Furthermore, the study highlights the emergence of a momentum crash in the Thai stock market, commencing in early 2020. Even amidst market crises such as the COVID-19 pandemic, certain enhanced strategies outperform the standard approach, particularly the dynamic approach. By considering the expected return in its scaling, this dynamic approach enables the portfolio to achieve high profitability during the momentum crash. Moreover, the study identifies that transaction costs are generally manageable, except for some significant levels observed in the standard momentum approach.

Finally, this study reveals that momentum portfolios display asymmetry in their sensitivity between bull and bear markets. These strategies tend to generate positive returns by aligning with the market during bullish phases, while moving in the opposite direction during bearish phases. By holding a momentum portfolio during a bullish market, investors can enjoy on the trend-following strategy. Conversely, during trend reversals, the sensitivity or risk automatically decreases. This decrease in sensitivity during trend reversals can be interpreted as an inherent risk management mechanism embedded within momentum portfolios. Throughout the sample period, these momentum strategies demonstrate a consistent characteristic, except during the crisis period. During this period, all momentum strategies exhibit significantly high sensitivity. However, the market's severe impact caused by the pandemic introduces changes in the characteristic of momentum portfolios, leading to a momentum crash and causing negative results and heightened volatility.