Industry momentum effect and autocorrelation: Evidence from Taiwan

The investigation of the momentum effect is important because this phenomenon indicates the predictability of the future return, which means that the momentum strategy can make profits. Past literature has found the industry momentum effect in American, European countries and indicated that the industry momentum effect mainly comes from the return autocorrelations. Little literature documents the industry momentum effect in emerging markets. Thus, the first purpose of this paper is to investigate whether the industry momentum effect also exists in the Taiwan stock market which is an emerging one toward maturity. The second purpose of this study is to compare the industry momentum effect between the all-industry group and the positive-autocorrelation industry group. This study contributes on that the positive-autocorrelation industry momentum strategy has higher returns and more of the formation and holding cells are significantly positive compared with the all-industry momentum strategy in Taiwan. Although past studies have verified that autocorrelation is one of the important sources of industry momentum profits, they did not explore the industry momentum effect of the positive-autocorrelation industries. Therefore, we supplement past studies by focusing on the positive-autocorrelation industries. We find that the industry momentum effect does not disappear; rather, it hides in the positive-autocorrelation industries. Moreover, the positive autocorrelation is related to the transfer of funds. The turnover rate which is the proxy of the transfer of funds can explain the positive autocorrelation of the industry returns.