Momentum effect of the real estate stocks in Hong Kong

Abstract

The study aims to study the momentum effect in the real estate stock market of Hong Kong. The momentum effect is a kind of market anomaly that could not be captured by traditional pricing models such as the Capital Assets Pricing Model and violates the Efficient Market Hypothesis. The momentum effect suggests that the prices of stocks have a tendency to continue in the short-to-medium horizon. In other words, stocks that outperform the market continue to outperform the market, while stocks that perform worse than the market continue to perform worse. The momentum effect has been discovered in different markets in different time horizons. As the momentum effect could not be explained by traditional finance theory, most of the explanation of the momentum effect falls in the field of behavioral finance. Motivated by several research papers demonstrating the existence of the momentum effect in the REIT market, the study aims to investigate the existence of the momentum effect in the real estate stocks in Hong Kong, and if yes whether the current theory could explain such effect. The study contains a total of 180 stocks that are listed on the Hong Kong Stock Exchange with the head-quarter located in Hong Kong within a sample period from 2012 to 2021. A 6-month formation, 6-month holding momentum strategy is constructed to investigate the magnitude of the momentum effect in Hong Kong, and a real estate-specific benchmark is constructed as a basis for comparison. The study finds that the momentum effect is strong in the real estate stocks in Hong Kong. During the sample period, the momentum strategy yields an average excess return of 1.70% per month. In particular, the study finds that the momentum effect is much more significant in the stocks that perform worse than the market. The study continues to investigate whether three popular theories in the field of behavioral finance, namely the information diffusion theory, overconfidence theory, and cognitive dissonance theory, are capable of explaining the momentum effect. To test the hypothesis, a multi-factor regression model is constructed. Unfortunately, the result shows that the momentum effect could not be captured by the proxies representing the hypothesis, suggesting that the momentum effect of real estate stocks in Hong Kong is affected by other factors. The study provides strong evidence of the existence of the momentum effect in Hong Kong. The result indicates that the real estate stock market in Hong Kong may not be as efficient as suggested by the Efficient Market Hypothesis, in which investors might still earn a premium by studying the historical price of real estate stocks. The study may serve as an inspiration for further study on the pricing anomaly of real estate stocks in Hong Kong.