Applying Momentum Investment Strategy in Amman Stock Exchange, and its Effect on the Market Efficiency and Abnormal Returns

Abstract

The study aims to examine the continuation of the returns hypothesis on which Momentum Investment Strategy (MIS) is based. Such a strategy has never been applied in Amman stock exchange (ASE) to achieve abnormal returns for investors. The study also aims to present a new methodology to examine the efficiency of the ASE on the weak form of the efficient market hypothesis in accordance with (Jegadeesh & Titman, 1993) methodology. The sample is constructed from 49 Jordanian firms listed on the ASE, none of which emerged, nor out of the ASE during the period from 1987 to 2005. The study concluded that it was possible to achieve abnormal returns in certain periods using MIS. It also concluded that the ASE was not efficient on the weak form of the efficient market hypothesis. The abnormal returns were not affected by the difference in systematic risk and that is not a result of returns' autocorrelation or residuals autocorrelation, but rather, a result of different investors' financial behaviors and their underreaction. The study revealed that such a strategy lasted for one year in the ASE, while in the USA, it lasted for three years. In conclusion, the study recommended that investors be encouraged to apply MIS in the ASE in a period of a year to achieve abnormal returns; investors should not depend on the capital assets pricing model (CAPM) as a pricing model of capital assets in ASE, and that more studies should be conducted about the aforementioned strategy.