A test of size effect on the short-run momentum in Japanese stock market

Abstract

The purpose of this study is to identify the relationship between firm size and the momentum effect in Japanese stock market. The research performed statistical analyses on the monthly, quarterly, semi annual, and annual average returns of all stocks included in TOPIX 1500 index that are also listed on the Tokyo Stock Exchange (TSE). To test for the effect of the firm size factor, the sample was subdivided into three equal parts, representing high-cap, medium-cap, and low-cap stocks respectively based on their market capitalization. The results of this study proved that momentum effect exists in Japanese stock market in the short-run and momentum investment strategy, where investors buy the winner stocks and short the loser stocks, generates abnormal return. Furthermore, regardless of the size effect, winner stocks presented stronger momentum than loser stocks. Considering the size effect, the abnormal return of momentum investment strategy was higher in high cap stocks than in low cap stocks. These results of the study will be a potential source for portfolio managers who are using or attempting to use the momentum investment strategy.