Testing International Momentum Strategies between Chinese and Australian Financial Markets

Abstract

This paper tests international momentum effects between Chinese Shanghai Composite Index and Australian resource stocks. If markets were efficient, there would be no profits from momentum strategies. Two momentum strategies are examined; index tracking and enhanced indexing. The enhanced indexing strategy is more profitable than the index tracking strategy, although the index tracking strategy had a higher Sharpe Ratio. Small capitalised stocks exhibit strong momentum effects. Using a newly developed partial adjustment model, support is provided for Chan et al (1996) who demonstrate that under-reaction to economic news explains momentum profits and Rouwenhorst (1998) who finds evidence of momentum effects in emerging countries.