MSc Accounting and Finance: Applied Econometrics Assessed Exercise
Instructions
Please complete the Exercise below and submit:
- Point 1. before 4/11/2018 at 23:59 on The Hub. Submission will only be possible via The Hub. Late submissions will not be considered.
- Points 2. and 3. before 3/12/2018 at 23:59 on The Hub. Submission will only be possible via The Hub. Late submissions will not be considered.
Please complete the exercise within your allocated syndicate groups and submit one solution for each group. The maximum number of pages for this exercise is 5, excluding tables and graphs. Papers exceeding the length limit will only be evaluated on the first 5 pages.
Exercise – Momentum
This empirical exercise is based on the work by Jegadeesh and Titman (2003).
Portfolios and factors construction
Let’s construct tradable portfolios from the given dataset.
- Upload data (filename: assignment data18.RData) in R.
- Data contain daily close prices, standard industrial classification (SIC) code and market cap (ME) for a large cross-section of stocks in the US. The first row contains the permno of any given stock, whereas the second row contains the date, the third the SIC code, the fourth the closing price, and the fifth market cap.
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3. Upload the five Fama-French factors and NYSE ME breakpoints monthly data from Kenneth French’s website. (careful, ME breakpoints are divided by 1,000,000 on French’s database, so you will have to multiply the num- bers by 1,000,000 to compare them with the market cap in the .mat file)
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
(Link).
Trading strategies
- Form decile momentum portfolios following the methodology of Jegadeesh and Titman (2003), using the top 50% ME and bottom 50% ME stocks. Report the average number of stocks within each decile, over the considered sample size.
(30% of mark)
- Calculate the returns of the momentum strategies, using the top 50% ME and bottom 50% ME stocks. For any of the two strategies, report summary statistics, Sharpe ratios, t-ratios, maximum drawdowns, a plot of the cumulative returns over time. Comment on the di↵erent performances and risk-return profiles of the strategies.
(45% of mark)
- Run regressions of each strategy’s returns on the five Fama-French factors and
comment on the sign, size and the significance of the estimated alphas and betas.
(25% of mark)
References
Jegadeesh, N. and S. Titman (2003). Returns to Buying Winners and Selling Losers: Implications for Stock Market Eciency. The Journal of Finance, 48, pp. 65-91.
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