Momentum Survival and Its Economic Significance: Evidence From an Emerging Market

Abstract

In this study, we examine the survival time of positive and negative momentum of the sector indices of an emerging market: Bangladesh. We exploit the economic significance of survival time by deriving trading strategies with mean survival time of the sector indices. Over the sample period we find that empirical positive (negative) survival time is overestimated (underestimated) compare to their corresponding simulated theoretical curve, indicating arbitrage opportunity. We derived momentum-based naïve sector rotation strategies to explore this arbitrage opportunity. All of our trading strategies provide substantially higher annualised return and higher Sharpe ratio compare to the DSE broad index as well as buy-and-hold strategies of sector indices. We further investigate whether the length of survival is increased or decreased by credit market variables. We found that interest rates, TERM spread, and DEFAULT spread influence the length of survival.