Momentum Profits in the Australian Equity Market: a Matched

This study examines the profitability of momentum trading strategies within the Australian equity

market. While this paper utilises the Jegadeesh and Titman (1993) equally weighted decile momentum

trading strategy, we extend their analysis in a number of significant ways. First, this study represents the

first application of Barber and Lyon's (1997) matched sample methodology to examine excess momentum

profits. Second, we also provide further Australian evidence on the robustness of excessmomentumprofits

to short selling restrictions and transaction costs in the form of bid-ask spreads. Further, we present the

first empirical study to document the average dollar profits obtainable fromimplementing a Jegadeesh and

Titman (1993) inspired momentum strategy incorporating short selling restrictions, transaction costs in

the form of buying at the ask price and selling at the bid price, and liquidity constraints.

We provide verification of the significance of momentum profits in the Australian equity market.

Although the extant empirical literature documents significant excess momentumprofits across numerous

overseas equity markets (see, for example, Rouwenhorst, 1998; Jegadeesh and Titman, 2001), existing

Australian evidence is both limited and contradictory. While Demir et al. (2004) and Marshall and Cahan

(2005) document excess returns, Griffin et al. (2003) fail to find evidence of significantmomentumprofits.

Our findings of six-month excess buy-and-hold returns of 17.88% when utilising Jegadeesh and Titman's

(1993) zero cost investment portfolio approach are consistent with those of Demir et al. (2004) and

Marshall and Cahan (2005).

More significantly, this paper provides the first examination of momentum profits using Barber and

Lyon (1997) size and book-to-market matched control portfolios. Using this methodology we document

six-month buy-and-hold excess momentum profits of 17.79%.

Furthermore, we provide the first evidence that momentum profits in the Australian...