A Multi-Factor and Portfolio-Based Approach of Momentum Anomaly and Risk Premium in the Indian Stock Market

Abstract

The study investigates the persistence and nature of the momentum effect in the Indian stock market, with the objective of determining whether it represents an exploitable anomaly or a systematic risk factor. Using a dataset of 232 continuously traded firms listed on the Nifty 500 index over the period July 2015 to June 2024, momentum portfolios were constructed following the Jegadeesh and Titman (1993) methodology across multiple formation and holding horizons. The performance of Winner, Loser, and Winner–Loser (WML) portfolios was evaluated using Sharpe ratios, Jensen’s alpha, and Newey–West robust tests. Results demonstrate that Winner portfolios consistently deliver positive and significant returns, Loser portfolios persistently underperform, and the resulting WML portfolios generate large and highly significant abnormal profits, with momentum strength increasing at longer horizons.

To examine whether momentum returns can be explained by risk factors, the study employs the Capital Asset Pricing Model (CAPM), the Fama–French three-factor model, and the Carhart four-factor model. Both the CAPM and three-factor models fail to account for the profitability of momentum strategies, as WML portfolios produce large and significant alphas across horizons. However, once the momentum factor is incorporated into the Carhart specification, abnormal returns largely disappear, suggesting that the momentum premium in India is not spurious but represents a distinct and priced risk factor.

Overall, the findings provide robust evidence of momentum in India and highlight its dual interpretation: as a persistent anomaly under conventional models and as a systematic risk factor within extended asset-pricing frameworks. The study contributes to the literature by offering comprehensive evidence on momentum in an emerging market, demonstrating its persistence across time horizons, and underscoring the inadequacy of traditional models in capturing its dynamics.