The Impact Of Trading Volume On Portfolios Effective Time Formation/Holding Periods Based On Momentum Investment Strategies

Abstract

This paper analyzes momentum investment strategies based on past market data to evaluate the impact of trading volume on price momentum for the Canadian Stock Market. Utilizing variant models of Jegadeesh and Titman (1993) and Lee and Swaminathan (2000), we evaluate the effective time formation/holding periods of portfolios using both past price and trading volume. The findings suggest that taking high trading volume into consideration in momentum investment strategies on the TSX between 1996 to 2004 generally outperformed a strictly price-based momentum strategy for both winners (t= 2.118, p< .05) and losers (t= 2.174, p< .05). The most effective time period for a winning-high-volume portfolio was nine months of formation, starting in April and a 3-month holding period. The holding period is shorter by six months compared to what is suggested by Assogbavi, et al. (2008). In addition, high-volume portfolios consistently bettered low-volume portfolios for both winners (t= 4.121, p< .001) and losers (t= 3.956, p< .001). For investors who base their portfolio construction on momentum investment strategies, these findings suggest that it would be wise to incorporate past trading volume in their selection process.