Momentum Investment

This study proposes using HMM in the momentum investment strategy and compares the performance of the HMM momentum portfolio with those of traditional momentum portfolios to demonstrate the usefulness of HMM for the momentum investment strategy. The results of the empirical analysis of this study can be summarized as follows.

First, the HMM stock momentum portfolio (Section 3.1) and HMM sector-stock momentum portfolio (Section 3.2) outperform the corresponding traditional momentum portfolio in all combinations of formation and holding periods.

Second, the results for the HMM stock momentum portfolio and HMM sector-stock momentum portfolio show similar characteristics: the portfolios constructed by 6-, 9-, and 12-month formation periods generate higher returns than those constructed by 1- and 3-month formation periods. It is also observed that portfolios with a 1-month holding period achieve the best performance within most formation periods.

Third, the HMM stock momentum portfolio and HMM sector-stock momentum portfolio with weekly rebalancing improve their performance and generate their best returns with a 1-month formation period.

Fourth, the HMM index momentum investment strategy significantly outperforms the buy and hold strategy for all indices.

In summary, the HMM improves the performance of the momentum strategy for stock portfolios, sector-stock portfolios, industry index portfolios, and KOSPI index portfolios over the period from January 2000 to December 2018. In addition, our experimental results suggest using a 1-month formation period and a 1-week holding period for the HMM momentum investment strategy.

A large number of models or techniques for creating an efficient portfolio consisting of various types of instruments have been developed by academics and practitioners. An effective investment strategy helps investors to achieve efficient investments as well as an efficient financial market, which is well known to play an important role in sustaining economic growth. To sustain a competitive advantage for portfolio management, stock market investors require a strategic investment decision that can maximize returns or minimize losses. The HMM momentum investment strategy can be used by portfolio managers for more efficient portfolios, and it contributes to the efficiency of financial markets. In this sense, the HMM momentum investment strategy developed in this paper plays a role in sustaining economic growth.

While the traditional momentum strategy theorized by Jegadeesh and Titman has been widely used in many studies, the effectiveness of the momentum strategy in the Korean stock market has not been determined. This study indicates that the momentum investment strategy using HMM is useful in the Korean stock market. However, this study has possible limitations. For instance, the experimental results are limited to the long-only momentum portfolio of Korean market assets. Based on our HMM momentum strategy, future research can be enriched by applying the HMM to the long-short momentum strategy or developing a new AI momentum strategy that can be utilized for other portfolios containing various types of financial assets on the global market.