Momentum Investment
In this section, we use 20 indices, including 19 industry indices and the KOSPI index, to construct the HMM index long-only momentum portfolio. Given the state of each index determined by HMM, we purchase the index only when it is in the rising state,
and we rebalance the portfolio every week. The experiment is conducted with a 1-week holding period and a 1-month formation period across 2, 3, 4, and 5 hidden states. In addition, we employ the buy and hold strategy with indices and compare the performance
of the HMM index momentum strategy with those of the buy and hold strategy. We also calculate the ratio of the period during which the portfolio takes a long position to the experimental period, which is denoted by the ratio of the long position period
(RLP). Table 7 shows the monthly returns of the HMM index momentum portfolio by 19 sectors and the overall market. The results in Table 7 are illustrated graphically in Figure 7. As shown in Table 7 and Figure 7, monthly returns from the HMM index
long-only momentum strategy are observed to be significantly higher than those obtained with the buy and hold strategy for all indices. These results are consistent with those reported by Nguyen.
Figure 7. Monthly returns of HMM Index momentum portfolio of 19 sectors and the overall market.
Table 7. Monthly returns of HMM index momentum portfolio of 19 sectors and the overall market.
| Index | Performance | Buy and Hold | HMM Index Momentum Strategy | ||||
| 2 States | 3 States | 4 States | 5 States | Average | |||
| KOSPI | RLP (%) | 100 | 72.53 | 50.81 | 59.67 | 58.07 | 60.27 |
| Returns | 0.36 | 0.92 | 1.01 | 0.82 | 0.85 | 0.9 | |
| Food and Beverage | RLP (%) | 100 | 57.4 | 65.34 | 53.5 | 52.03 | 57.07 |
| Returns | 0.53 | 1.22 | 1.22 | 1.19 | 0.95 | 1.15 | |
| Textile and Apparel | RLP (%) | 100 | 80.32 | 35.34 | 42.97 | 41.96 | 50.15 |
| Returns | −0.12 | 0.73 | 1.35 | 1.19 | 0.94 | 1.05 | |
| Paper and Wood | RLP (%) | 100 | 60.81 | 58.01 | 56.21 | 56.19 | 57.81 |
| Returns | −0.02 | 1.16 | 1.1 | 1.19 | 1.33 | 1.2 | |
| Industrial Materials | RLP (%) | 100 | 63.94 | 74.24 | 53.67 | 51.02 | 60.72 |
| Returns | 0.79 | 1.35 | 1.32 | 1.02 | 1.14 | 1.21 | |
| Pharmaceuticals and Biotechnology | RLP (%) | 100 | 75.76 | 63.49 | 73.83 | 70.37 | 70.86 |
| Returns | 1.08 | 1.11 | 1.4 | 1.23 | 1.14 | 1.22 | |
| Nonferrous Metals | RLP (%) | 100 | 54.65 | 71.2 | 52.55 | 57.23 | 58.91 |
| Returns | 0.55 | 1.45 | 1.47 | 1.32 | 1.27 | 1.38 | |
| Steel and Metal | RLP (%) | 100 | 53.45 | 50.2 | 52.44 | 50.21 | 51.58 |
| Returns | 0.57 | 1.53 | 1.22 | 0.97 | 0.96 | 1.17 | |
| Machine | RLP (%) | 100 | 68.69 | 65.21 | 56.81 | 54.15 | 61.22 |
| Returns | 0.3 | 1.41 | 1.11 | 1.33 | 1.2 | 1.26 | |
| Electronic Components | RLP (%) | 100 | 83.23 | 44.62 | 61.1 | 51.18 | 60.03 |
| Returns | 0.62 | 0.92 | 1.18 | 1.06 | 0.9 | 1.01 | |
| Medical Precision | RLP (%) | 100 | 63.39 | 60.95 | 44.09 | 63.75 | 58.05 |
| Returns | 0.42 | 2.6 | 2.24 | 2.13 | 2.16 | 2.28 | |
| Transportation and Equipment | RLP (%) | 100 | 65.35 | 73.83 | 63.03 | 63.82 | 66.51 |
| Returns | 0.72 | 1.62 | 1.37 | 1.44 | 1.53 | 1.49 | |
| Retail and Trading | RLP (%) | 100 | 72.53 | 53.14 | 50.51 | 45.12 | 55.33 |
| Returns | 0.14 | 0.86 | 1.07 | 0.77 | 0.88 | 0.9 | |
| Utilities | RLP (%) | 100 | 63.94 | 68.46 | 61.1 | 55.37 | 62.22 |
| Returns | 0.03 | 0.61 | 0.62 | 0.37 | 0.36 | 0.49 | |
| Construction | RLP (%) | 100 | 68.38 | 39.45 | 44.7 | 58.9 | 52.86 |
| Returns | 0.08 | 1.1 | 0.74 | 1.06 | 0.9 | 0.95 | |
| Transportation and Logistics | RLP (%) | 100 | 71.81 | 48.68 | 36.15 | 50.98 | 51.91 |
| Returns | 0.32 | 0.99 | 0.81 | 1.05 | 1.02 | 0.97 | |
| Telecom Services | RLP (%) | 100 | 53.94 | 52.85 | 49.9 | 42.77 | 49.87 |
| Returns | −0.32 | −0.11 | 0.4 | 0.11 | −0.26 | 0.04 | |
| Bank | RLP (%) | 100 | 75.86 | 69.17 | 66.6 | 48.3 | 64.98 |
| Returns | 0.25 | 0.55 | 0.76 | 0.35 | 0.48 | 0.54 | |
| Securities | RLP (%) | 100 | 46.57 | 65.21 | 42.78 | 46.95 | 50.38 |
| Returns | −0.11 | 1.03 | 0.8 | 0.95 | 0.83 | 0.9 | |
| Insurance | RLP (%) | 100 | 76.17 | 61.87 | 44.7 | 51.23 | 58.49 |
| Returns | 0.79 | 1.13 | 0.89 | 0.74 | 0.88 | 0.91 | |