Multifactor models of momentum portfolios on the Warsaw Stock Exchange, 1999–2009

The continuation of returns in momentum strategies is one of the important areas of investigation. One of the main research problems is the identification of a source or sources of these returns. Several hypotheses were advanced in the literature, related to the autocorrelation of returns, the cross-serial covariance of returns or the cross-sectional variation in unconditional and conditional mean returns [see e.g. [Jegadeesh and Titman, 2001; Lewellen, 2002; Chen and Hong, 2002; Du and Watkins, 2007; Dittmar et al., 2007]. Another line of research tries to investigate the characteristics of momentum portfolios in terms of factor returns models, e.g. the Fama and French model. Such approach can potentially shed light both on factor models and their practical applications, as well as explain momentum returns in terms of some other portfolio characteristics. Below, we follow this second line of investigation and contribute to the existing literature, first, by proposing new multifactor decompositions of momentum profits, and, second, by the examination of such profits in an emerging stock market, the Warsaw Stock Exchange (WSE) [see e.g. van der Hart et al., 2003 and 2005].
Specifically, we construct four new factors based on the relative value of stocks and on corporate liquidity measures and check if such factors better explain momentum profits on the WSE during the past decade than the standard factor models.