Document Type : Original Article
Authors
1 Allameh Tabatabaei University
2 Islamic Azad University, South Tehran Branch
3 Islamic Azad University, Islamshahr Branch
Abstract
The purpose of this paper is to analyze the relationship between default risk and momentum effect using data from companies listed on Tehran Stock Exchange.To calculate default risk,we used Black-Scholes-Merton (BSM) option pricing model. To describe momentum effect, by determining the formation period to be 6 months, and the holding period to be 3,6, or 12 months, we firstlyexamined the profitability of short term (3/6), midterm (6/6), and long term (12/6) momentum strategies and found that during 2010-2015 time period, only midterm momentum strategy is profitable.Then,we showedthere is no relationship between default risk andmomentum effect.
Keywords
. Abinzano, I., Muga, L. and Santamaría, R. (2014). Is default risk the hidden factor in
momentum returns? some empirical results.Accounting & Finance, 54(3), 671-698.
2. Aboody, D., Lehavy, R. and Trueman, B. (2010). Limited attention and the earnings
announcement returns of past stock market winners. Review of Accounting Studies, 15, 317-344.
3. Agarwal, V. and Taffler, R. (2008).Does financial distress risk drive the momentum
anomaly?Financial Management, 37, 461-484.
4. Amihud, Y. (2002). Illiquidity and stock returns: cross-section and time-series effects.
Journal of Financial Markets, 5, 31-56.
5. Antoniou, C., Doukas, J. A. and Subrahmanyam, A. (2013). Cognitive dissonance,
sentiment and momentum. Journal of Financial and Quantitative Analysis, 48(1), 245-275.
6. Avramov, D., Cheng, S. and Hameed, A. (2016). Time-varying liquidity and momentum
profits. Journal of Financial and Quantitative Analysis, 51(6), 1897-1923.
7. Avramov, D., Chordia, T., Jostova, G. and Philipov, A. (2007). Momentum and credit
rating. Journal of Finance, 62(5), 2503-2520.
8. Baker, M. and Wurgler, J. (2006). Investor sentiment and the cross-section of stock returns.
Journal of Finance, 61(4), 1645-1680.
9. Barberis, N., Shleifer, A. and Vishny, R. (1998). A model of investor sentiment.Journal of
Financial Economics, 49(3), 307-343.
10.Black, F. and Scholes, M. (1973). The pricing of options and corporate liabilities.Journal of
Political Economy, 81, 637-654.
11.Bottazzi, G., Grazzi, M., Secchi, A. and Tamagni, F. (2011). Financial and economic
determinants of firm default. Journal of Evolutionary Economics, 21(3), 373-406.
12.Byström, H. (2006). Merton unraveled: a flexible way of modeling default risk. Journal of
Alternative Investments, 8(4), 39-47.
13.Byström, H., Worasinchai, L. and Chongsithipol, S. (2005). Default risk, systematic risk
and Thai firms before, during and after the Asian crisis. Research in international business
and finance, 19(1), 95-110.
14.Chava, S. and Purnanandam, A. (2010). Is default risk negatively related to stock returns?
Review of Financial Studies, 23(6), 2523–2559.
15.Chen, C. M. and Lee, H. H. (2013). Default risk, liquidity risk, and equity returns: evidence
from the Taiwan market. Emerging Markets Finance and Trade, 49(1), 101-129.
16.Cooper, M, J., Gutierrez JR, R, C. and Hammed, A. (2004). Market states and
momentum.Journal of Finance, 59(3), 1345-1365.
17.Crosbie, P. and Bohn, J. (2003). Modeling default risk. Moody’s KMV.
18.Crouhy, M., Galai, D. and Mark, R. (2000). A comparative analysis of current credit risk
models. Journal of Banking & Finance,24(1-2), 59-117.
19.Daniel, K., Hirshleifer, D. and Subrahmanyam, A. (1998). Investor psychology
andsecuritymarket under- and overreactions.Journal of Finance, 53(6), 1839-1885.
20.EbrahimiKordlar, A. and Mohammadi Shad, Z. (2014).Investigating the relationship
between default risk and earnings response coefficient. The Iranian Accounting and
Auditing Review, 21(1), 1-18. [In Persian]
21.Ghalibf Asl, H., Shams, S. Sh. and Sadehvand, M. J. (2010). Examining the excess return of
earnings and price momentum strategies in Tehran Stock Exchange. The Iranian
Accounting and Auditing Review, 17(3), 99-116. [In Persian]
22.Glaser, M. and Weber, M. (2003). Momentum and turnover: evidence from the German
stock market. Schmalenbach Business Review, 55, 108-135.
23.Griffin, J. M., Ji, X. and Martin, J. S. (2003), Momentum investing and business cycle risk:
evidence from pole to pole. Journal of Finance, 58(6), 2515-2547.
46 Iranian Journal of Finance
24.Hakkak, M. and Akbari, Z. (2012).Examining and testing the momentum phenomenon in
rising and falling markets.journal of Investment knowledge, 1(3), 47-62.[In Persian]
25.Hameed, A. and Kusnadi, Y. (2002). Momentum strategies: evidence from Pacific Basin
stock markets.Journal of Financial Research, 25, 383-397.
26.Hillegeist, S. A., Keating, E. K., Cram, D. P. and Lundstedt, K. G. (2004). Assessing the
probability of bankruptcy. Review of Accounting Studies, 9, 5-34.
27.Hlinka, M. (2008). Corporate governance and momentum strategies. Master Thesis.
Eastern Kentucky University.
28.Hong, H. and Stein, J. C. (1999). A unified theory of underreaction, momentum trading, and
overreaction in asset markets. Journal of Finance, 54(6), 2143-2184.
29.Hong, H., Lim, T. and Stein, J. C. (2000). Bad news travels slowly: size, analyst coverage,
and the profitability of momentum strategies.Journal of Finance, 55, 256-295..
30.Jegadeesh, N. and Titman, S. (1993). Returns to buying winners and selling losers:
Implications for stock market efficiency.Journal of Finance, 48, 65-91.
31.Jegadeesh, N. and Titman, S. (2001). Profitability of momentum strategies: an evaluation of
alternative explanations, Journal of Finance, 26, 633-111.
32.Jiang, G., Lee, C., Lee, M. C. and Zhang, G. Y. (2005). Information uncertainty and
expected stock returns. Review of Accounting Studies,10,185-221.
33.Kang, C. O. and Kang, H. G. (2009). The effect of credit risk on stock returns. Journal of
Economic Research, 14(2), 49-67.
34.Li, D. and Xia, Y. (2015). The effect of stock liquidity on default risk. Working Paper.
University of Hong Kong.
35.Mahajan, A., Petkevich, A. and Petkova, R. (2012). Momentum and aggregate default risk.
Mays Business School Research Paper No. 2012-39. Available at SSRN:
https://ssrn.com/abstract=2054707 or http://dx.doi.org/10.2139/ssrn.2054707.
36.Merton, R. C. (1974). On the pricing of corporate debt: The risk structure of interest rates.
Journal of Finance, 29(2), 449-470.
37.Moskowitz, T, J. and Grinblatt, M. (1999). Do industries explain momentum? Journal of
Finance, 54(4), 1249-1290.
38.Muga, L. and Santamaría, R. (2007a). The momentum effect in Latin American emerging
markets. Emerging Markets Finance and Trade, 43(4), 25-46.
39.Muga, L. and Santamaría, R. (2007b).New economy: firms and momentum. Journal of
Behavioral Finance, 8(2), 109-120.
40.Muga, L. and Santamaría, R. (2009). Momentum, market states and investor behavior.
Empirical Economics, 37(1), 105-130.
41.Rouwenhorst, K. G. (1998). International momentum strategies. Journal of Finance, 53, 267-284.
42.Saali, T. (2014). Liquidity and anomalies: study on stock market liquidity and its effect on
momentum and value investment returns. Master Thesis. Aalto University.
43.Stambaugh, R. F., Yu, J. and Yuan, Y. (2012). The short of it: investor sentiment and
anomalies. Journal of Financial Economics, 104(2), 288-302.
44.Stivers, C. and Sun, L. (2010). Cross-sectional return dispersion and time-variation in value
and momentum premia. Journal of Financial and Quantitative Analysis, 45(4), 987-1014.
45.Tehrani, R., Ansari, H. and Saranj, A. R. (2013). The relationship between momentum strategy’s
return and stock liquidity. Journal of Financial Management Strategy, 1(2), 71-88. [In Persian]
46.Vassalou, M. and Xing, Y. (2004). Default risk in equity returns.Journal of Finance, 59(2), 831-868.
47.Vassalou, M., Chen, J. and Zhou, L. (2005). The interrelation of liquidity risk, default risk,
and equity returns. EFA Zurich Meetings. Available at: http://ssrn.com/abstract=922622.
48.Wang, K. Q. and Xu, J. (2015). Market volatility and momentum. Journal of Empirical
Finance, 30, 79-91.
49.Yahyazadehfar, M. and Lorestani, S. (2012). Examining the effect of trading volume on
Contrarian and Momentum Strategies’ return in Tehran Stock Exchange. Journal of
Empirical Research in Accounting, 2(2), 33-48. [In Persian]
50.Zhang, X. F. (2006). Information uncertainty and stock returns. Journal of Finance, 61, 105-136.
momentum returns? some empirical results.Accounting & Finance, 54(3), 671-698.
2. Aboody, D., Lehavy, R. and Trueman, B. (2010). Limited attention and the earnings
announcement returns of past stock market winners. Review of Accounting Studies, 15, 317-344.
3. Agarwal, V. and Taffler, R. (2008).Does financial distress risk drive the momentum
anomaly?Financial Management, 37, 461-484.
4. Amihud, Y. (2002). Illiquidity and stock returns: cross-section and time-series effects.
Journal of Financial Markets, 5, 31-56.
5. Antoniou, C., Doukas, J. A. and Subrahmanyam, A. (2013). Cognitive dissonance,
sentiment and momentum. Journal of Financial and Quantitative Analysis, 48(1), 245-275.
6. Avramov, D., Cheng, S. and Hameed, A. (2016). Time-varying liquidity and momentum
profits. Journal of Financial and Quantitative Analysis, 51(6), 1897-1923.
7. Avramov, D., Chordia, T., Jostova, G. and Philipov, A. (2007). Momentum and credit
rating. Journal of Finance, 62(5), 2503-2520.
8. Baker, M. and Wurgler, J. (2006). Investor sentiment and the cross-section of stock returns.
Journal of Finance, 61(4), 1645-1680.
9. Barberis, N., Shleifer, A. and Vishny, R. (1998). A model of investor sentiment.Journal of
Financial Economics, 49(3), 307-343.
10.Black, F. and Scholes, M. (1973). The pricing of options and corporate liabilities.Journal of
Political Economy, 81, 637-654.
11.Bottazzi, G., Grazzi, M., Secchi, A. and Tamagni, F. (2011). Financial and economic
determinants of firm default. Journal of Evolutionary Economics, 21(3), 373-406.
12.Byström, H. (2006). Merton unraveled: a flexible way of modeling default risk. Journal of
Alternative Investments, 8(4), 39-47.
13.Byström, H., Worasinchai, L. and Chongsithipol, S. (2005). Default risk, systematic risk
and Thai firms before, during and after the Asian crisis. Research in international business
and finance, 19(1), 95-110.
14.Chava, S. and Purnanandam, A. (2010). Is default risk negatively related to stock returns?
Review of Financial Studies, 23(6), 2523–2559.
15.Chen, C. M. and Lee, H. H. (2013). Default risk, liquidity risk, and equity returns: evidence
from the Taiwan market. Emerging Markets Finance and Trade, 49(1), 101-129.
16.Cooper, M, J., Gutierrez JR, R, C. and Hammed, A. (2004). Market states and
momentum.Journal of Finance, 59(3), 1345-1365.
17.Crosbie, P. and Bohn, J. (2003). Modeling default risk. Moody’s KMV.
18.Crouhy, M., Galai, D. and Mark, R. (2000). A comparative analysis of current credit risk
models. Journal of Banking & Finance,24(1-2), 59-117.
19.Daniel, K., Hirshleifer, D. and Subrahmanyam, A. (1998). Investor psychology
andsecuritymarket under- and overreactions.Journal of Finance, 53(6), 1839-1885.
20.EbrahimiKordlar, A. and Mohammadi Shad, Z. (2014).Investigating the relationship
between default risk and earnings response coefficient. The Iranian Accounting and
Auditing Review, 21(1), 1-18. [In Persian]
21.Ghalibf Asl, H., Shams, S. Sh. and Sadehvand, M. J. (2010). Examining the excess return of
earnings and price momentum strategies in Tehran Stock Exchange. The Iranian
Accounting and Auditing Review, 17(3), 99-116. [In Persian]
22.Glaser, M. and Weber, M. (2003). Momentum and turnover: evidence from the German
stock market. Schmalenbach Business Review, 55, 108-135.
23.Griffin, J. M., Ji, X. and Martin, J. S. (2003), Momentum investing and business cycle risk:
evidence from pole to pole. Journal of Finance, 58(6), 2515-2547.
46 Iranian Journal of Finance
24.Hakkak, M. and Akbari, Z. (2012).Examining and testing the momentum phenomenon in
rising and falling markets.journal of Investment knowledge, 1(3), 47-62.[In Persian]
25.Hameed, A. and Kusnadi, Y. (2002). Momentum strategies: evidence from Pacific Basin
stock markets.Journal of Financial Research, 25, 383-397.
26.Hillegeist, S. A., Keating, E. K., Cram, D. P. and Lundstedt, K. G. (2004). Assessing the
probability of bankruptcy. Review of Accounting Studies, 9, 5-34.
27.Hlinka, M. (2008). Corporate governance and momentum strategies. Master Thesis.
Eastern Kentucky University.
28.Hong, H. and Stein, J. C. (1999). A unified theory of underreaction, momentum trading, and
overreaction in asset markets. Journal of Finance, 54(6), 2143-2184.
29.Hong, H., Lim, T. and Stein, J. C. (2000). Bad news travels slowly: size, analyst coverage,
and the profitability of momentum strategies.Journal of Finance, 55, 256-295..
30.Jegadeesh, N. and Titman, S. (1993). Returns to buying winners and selling losers:
Implications for stock market efficiency.Journal of Finance, 48, 65-91.
31.Jegadeesh, N. and Titman, S. (2001). Profitability of momentum strategies: an evaluation of
alternative explanations, Journal of Finance, 26, 633-111.
32.Jiang, G., Lee, C., Lee, M. C. and Zhang, G. Y. (2005). Information uncertainty and
expected stock returns. Review of Accounting Studies,10,185-221.
33.Kang, C. O. and Kang, H. G. (2009). The effect of credit risk on stock returns. Journal of
Economic Research, 14(2), 49-67.
34.Li, D. and Xia, Y. (2015). The effect of stock liquidity on default risk. Working Paper.
University of Hong Kong.
35.Mahajan, A., Petkevich, A. and Petkova, R. (2012). Momentum and aggregate default risk.
Mays Business School Research Paper No. 2012-39. Available at SSRN:
https://ssrn.com/abstract=2054707 or http://dx.doi.org/10.2139/ssrn.2054707.
36.Merton, R. C. (1974). On the pricing of corporate debt: The risk structure of interest rates.
Journal of Finance, 29(2), 449-470.
37.Moskowitz, T, J. and Grinblatt, M. (1999). Do industries explain momentum? Journal of
Finance, 54(4), 1249-1290.
38.Muga, L. and Santamaría, R. (2007a). The momentum effect in Latin American emerging
markets. Emerging Markets Finance and Trade, 43(4), 25-46.
39.Muga, L. and Santamaría, R. (2007b).New economy: firms and momentum. Journal of
Behavioral Finance, 8(2), 109-120.
40.Muga, L. and Santamaría, R. (2009). Momentum, market states and investor behavior.
Empirical Economics, 37(1), 105-130.
41.Rouwenhorst, K. G. (1998). International momentum strategies. Journal of Finance, 53, 267-284.
42.Saali, T. (2014). Liquidity and anomalies: study on stock market liquidity and its effect on
momentum and value investment returns. Master Thesis. Aalto University.
43.Stambaugh, R. F., Yu, J. and Yuan, Y. (2012). The short of it: investor sentiment and
anomalies. Journal of Financial Economics, 104(2), 288-302.
44.Stivers, C. and Sun, L. (2010). Cross-sectional return dispersion and time-variation in value
and momentum premia. Journal of Financial and Quantitative Analysis, 45(4), 987-1014.
45.Tehrani, R., Ansari, H. and Saranj, A. R. (2013). The relationship between momentum strategy’s
return and stock liquidity. Journal of Financial Management Strategy, 1(2), 71-88. [In Persian]
46.Vassalou, M. and Xing, Y. (2004). Default risk in equity returns.Journal of Finance, 59(2), 831-868.
47.Vassalou, M., Chen, J. and Zhou, L. (2005). The interrelation of liquidity risk, default risk,
and equity returns. EFA Zurich Meetings. Available at: http://ssrn.com/abstract=922622.
48.Wang, K. Q. and Xu, J. (2015). Market volatility and momentum. Journal of Empirical
Finance, 30, 79-91.
49.Yahyazadehfar, M. and Lorestani, S. (2012). Examining the effect of trading volume on
Contrarian and Momentum Strategies’ return in Tehran Stock Exchange. Journal of
Empirical Research in Accounting, 2(2), 33-48. [In Persian]
50.Zhang, X. F. (2006). Information uncertainty and stock returns. Journal of Finance, 61, 105-136.
)