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