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Document Type
Dissertation
Major/Program
Finance
First Advisor's Name
Ali M. Parhizgari
First Advisor's Committee Title
Committee Chair
Second Advisor's Name
Arun J. Prakash
Second Advisor's Committee Title
Committee Member
Third Advisor's Name
Chun-Hao Chang
Third Advisor's Committee Title
Committee Member
Fourth Advisor's Name
Juan I. Sanchez
Fourth Advisor's Committee Title
Committee Member
Keywords
genetic algorithms, momentum strategies, global investments
Date of Defense
7-21-2008
Abstract
The profitability of momentum portfolios in the equity markets is derived from the continuation of stock returns over medium time horizons. The empirical evidence of momentum, however, is significantly different across markets around the world. The purpose of this dissertation is to: 1) help global investors determine the optimal selection and holding periods for momentum portfolios, 2) evaluate the profitability of the optimized momentum portfolios in different time periods and market states, 3) assess the investment strategy profits after considering transaction costs, and 4) interpret momentum returns within the framework of prior studies on investors’ behavior. Improving on the traditional practice of selecting arbitrary selection and holding periods, a genetic algorithm (GA) is employed. The GA performs a thorough and structured search to capture the return continuations and reversals patterns of momentum portfolios. Three portfolio formation methods are used: price momentum, earnings momentum, and earnings and price momentum and a non-linear optimization procedure (GA). The focus is on common equity of the U.S. and a select number of countries, including Australia, France, Germany, Japan, the Netherlands, Sweden, Switzerland and the United Kingdom. The findings suggest that the evolutionary algorithm increases the annualized profits of the U.S. momentum portfolios. However, the difference in mean returns is statistically significant only in certain cases. In addition, after considering transaction costs, both price and earnings and price momentum portfolios do not appear to generate abnormal returns. Positive risk-adjusted returns net of trading costs are documented solely during “up” markets for a portfolio long in prior winners only. The results on the international momentum effects indicate that the GA improves the momentum returns by 2 to 5% on an annual basis. In addition, the relation between momentum returns and exchange rate appreciation/depreciation is examined. The currency appreciation does not appear to influence significantly momentum profits. Further, the influence of the market state on momentum returns is not uniform across the countries considered. The implications of the above findings are discussed with a focus on the practical aspects of momentum investing, both in the U.S. and globally.
Identifier
FI08121911
Recommended Citation
Pavlova, Ivelina, "Genetic Algorithms and Investment Strategies: A Global Perspective" (2008). FIU Electronic Theses and Dissertations. 70.
https://digitalcommons.fiu.edu/etd/70
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