Momentum and Bubbles: Analysis of Cyprus Stock Exchange Performance

This report investigates the application of momentum theory within the Cyprus Stock Exchange, focusing on the period between 1999 and 2008. It examines how market trends, specifically periods of significant growth and decline, impact investment strategies. The study utilizes financial tools such as the coefficient of intercept of regression, Capital Asset Pricing Model (CAPM), and Sharpe ratio to assess the performance of stocks during both bullish and bearish market conditions. The methodology involves analyzing data from the Cyprus Stock Exchange, including index values and share prices, to compute and correlate these statistical measures. The report aims to determine the effectiveness of momentum-based investment strategies by comparing the performance of portfolios during different market phases. Historical data from the Cyprus stock exchange is examined to determine the practical application of momentum theory in the real world.

Momentum and Bubbles:
Application to the Cypriot Stock
Exchange

TABLE OF CONTENTS
CHAPTER-1....................................................................................................................................1
Theoretical concepts used in practical application......................................................................1
REFERENCES................................................................................................................................4

CHAPTER-1
Theoretical concepts used in practical application
Momentum theory is the significant concept that is used by different investors. Whether,
it is retail or giant investor firm, this theory is employed by each sort of investor in order to make
profit in the business. This theory believes that in a market, there are two kinds of trends that are
normally observed. These two trends are upward and downward movement in shares price.
Upward movement in share price means that specific company’s share value is increasing
consistently. Contrary to this, downward movement of market crash means price of specific
company is declining consistently (Fama and French, 2012). This theory holds that when market
is bullish then investors must take long position on shares and must capitalise opportunities that
originate in the market due to consistent upward movement in stock market. As per this theory,
investors who hold their positions in the market for long time period when market is moving
towards its peak point earn huge amount of profit on investment. Even in a situation when stock
price decline too much, devaluation in value of shares price is not observed. This is because;
investors have strong confidence on the fact that in future also index will rose by good
percentage or points. This means that when market is bullish, investors hold long position, get
huge benefit and share price declines, at that time investor’s loss is minimised. This theory is
applied on the companies that are listed in the Cyprus stock exchange and application of this
theory is tested by taking a data related to years when market was too volatile and market rose
and falls by high percentage in specific duration. In this regard, some of the statistical and
financial tools are used and calculations are performed. Performance of shares in boom and
market crash period will be compared with each other to measure practical application of
momentum theory. Tools or concepts that will be employed in the research are explained below. Coefficient of intercept of regression- This is one of the important statistical tool that is
often used by the researchers. Under this method, one identifies the extent to which two
or more predator variables bring change in dependent variable (Vayanos and Woolley,
2013). This tool will help in understanding the extent to which changes comes in shares
price with change in index value in bullish and bearish performance of stock market.
Thus, this tool reflects whether with big percentage change in index value, type of change
comes in shares price as well. This tool will also help in testing that when market is
consistently moving upward then, share price also rise sharply.
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 CAPM- Capital Asset Pricing Model (CAPM) is well known model used by the stock
market experts. This model states that the minimum return that investor must earn for the
risk he takes in his business. This return is computed after deducting risk free rate from
the market return. By comparing current return with the CAPM value, it is measured
whether stock gives appropriate amount of return to the investors or not. In this model,
beta value is taken into consideration which reflects the percentage change that may
happen in the share price with change in index value. Risk free rate of return is also taken
into account in this model (Wu, 2011). Risk free rate refers to the return that is given by
the Treasury bill. It is assumed that shares in which investor makes an investment will at
least earn return equivalent to one that is given by Treasury bill. By comparing CAPM
value with actual stock return for 1999-2002 and 2004-2004, it will be measured whether
investors that have long position in the stock market are earning good profit when market
is strongly moving upward or not. Sharpe ratio- This is very important ratio because it indicates return that investors are
earning for each unit of risk that they take on investment. In this ratio, first of all risk free
rate of return is deducted from the market return and then divided by the standard
deviation. This ratio measures the return that investor is receiving for each unit of risk he
takes in investment. In order to measure application of this concept for momentum
theory, Sharpe ratio of specific company share for boom and market decline time period
will be compared (Edmans, 2011). If value of Sharpe ratio will be higher in boom then,
market crash period will be assumed that momentum theory is working in real world.
 Risk premium- This is one of important concepts that will be used in CAPM or capital
asset pricing model. Risk premium refers to the excess return that investor is earning on
investment made in the specific company shares. For this, risk free rate of return is
deducted from the market return. The difference between both types of return is risk
premium and it is the actual amount that investor earn for risk he takes on investment in
shares. If risk premium is increasing in market boom period then, it can be said that with
increase in index value share price also rose by good percentage. Similarly, if market
slips by high percentage and risk premium decline then, it means that with the decline in
index value, share price is also falling continuously.
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These were some other concepts as well that will be used to prove the hypothesis that a
long-only portfolio of winners will outperform in the momentum portfolio during the rising stage
of prices while a short-only portfolio of losers will outperform the momentum portfolio. Results
of all these tools will be interlined to each other in order to prove the hypothesis (Why Newton
was wrong, 2011). Values of these statistical tools individually can also be used to measure
practical application of the momentum theory in real world. In order to do all these calculations,
data related to firms share price will be taken into account and according to requirement of
calculations, collected facts will be utilised in this research. Hence, in this way, entire research
will be carried out and hypothesis will be proved.
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CHAPTER -2
METHODOLOGY
Methodology of momentum
Stock market is one of the most volatile market relative to other financial market.
Fluctuation in index value occur in tandem on daily basis when nation economy is not in good
condition. Due to this reason investors face heavy loss in their business. Contrary, to this when
economy is in good condition then index value rose sharply and intellectual investors earn huge
amount of profit in the business. When economy is in too good or bad condition momentum
comes in existence. The reason is simple when economy growth rate increase it is interpreted
that companies operating in that nation also grow (Goo and et.al., 2010). This create positive
investment sentiments among domestic and foreign investors. One by one many investors start
making investment in specific country stock market. In this way momentum comes in existence
in the market and index as well as shares price of companies. In this project in order to
understand momentum theory two duration's are taken 1999-2002 and 2004-2008. Three starting
months of 1999 which are Jan-March are taken in to consideration. Three ending months of 2002
are also taken in to consideration. Same things are done in case of duration of 2004-2008. There
are different trends in these months for specific duration and in this way different stages of
momentum (rise and fall) are identified. The values of coefficient intercept and CAPM as well as
Sharpe ratio are computed and correlated with each other to prove research hypothesis. This is
done for both year group which are 1999-2002 and 2004-2008. In this way entire work on
momentum theory is done in the report. For computing CAPM beta value is computed and risk
free rate of return is taken in to consideration. On this basis minimum return that portfolio must
earn is determined. By using Sharpe ratio return that portfolio is earning on each of unit of risk is
measured. Intercept coefficient is reflecting the change in portfolio that can be observed due to
change in index value. Results of all these tools will be compared and interlined with each other
in order to prove hypothesis.
Detail about data
Data play a very important role in conducting a research in systematic way. It is very
important to collect reliable data. This is because if data will not be reliable or accurate then
research will produce wrong results. Not only data it is also very important to use appropriate
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tools for conducting a research. If wrong tools will be used in the research then it will be very
difficult to prove the hypothesis. In order to carry out research work, data related to companies
that are element of Cyprus stock exchange in taken from reliable sites like website of relevant
stock exchange and trading economics. From these sites data for the months January- March and
October- December is taken for doing various calculations. Value of index for these months is
taken from excel sheet that is downloaded from the website of Cyprus stock exchange. On the
basis of this collected data value of CAPM, Sharpe ratio and intercept coefficient is computed.
After collection of entire data all re arranged in systematic way and percentage return table is
computed. In order to create a portfolio companies which give negative return in comparison to
previous year is identified. Then two separate tables are prepared and in one of them companies
whose shares price surge are included. Whereas, in another table those companies are taken
whose shares price devalued in given time period. After that different portfolio are prepared on
the basis of highest and modest return on shares. Then average return of each separate portfolio
is calculated. Along with this, average beta and standard deviation is also calculated. On the
basis of this entire work intercept coefficient, CAPM and Sharpe ratio is calculated. In this way
entire data is prepared for proving hypothesis of research.
Information of stock market history peak and low
1999 (January-June)
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8
1 2 3 4 5 6
0
20
40
60
80
100
120
140
Column F
Illustration 1: Change in Cyprus stock exchange index value from January- June 1999

1999 (July-December)
2000 (January-June)
9
1 2 3 4 5 6
0
200
400
600
800
1000
1200
Column F
Illustration 2: Change in Cyprus stock exchange index value from July-December 1999

10
1 2 3 4 5 6
0
100
200
300
400
500
600
700
800
Column F
Illustration 3: Change in Cyprus stock exchange index value from January to June 2000

2001 (January-June )
2001 (July-December)
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1 2 3 4 5 6
0
100
200
300
400
500
600
700
800
900
1000
Column E
Illustration 4: Change in Cyprus stock exchange index value from January to June 2001
1 2 3 4 5 6
0
100
200
300
400
500
600
700
Column E
Illustration 5: Change in Cyprus stock exchange index value from July-December 2001

2002 (January-June )
2002 (July-December)
12
1 2 3 4 5 6
0
100
200
300
400
500
600
Column E
Illustration 6: Change in Cyprus stock exchange index value from January to June 2002

Cyprus stock exchange had established by the stock exchange law. In this regard bill was
passed in the parliament in April 1993. Cyprus stock exchange commence its operations on 29th
March 1996. in Cyprus stock exchange shares and bonds both can be listed. There are number of
public and private limited companies that raised a fund from Cyprus stock exchange. It can be
observed from the chart that from January to December 1999 index value rise sharply. This trend
become more stronger in the end months of 1999. From the month of January- June index value
fluctuate and decline. Due to this reason many investors loss their money. Same trend remain
continue in upcoming years till 2002. However, in late 2002 trend get changed to some extent
and index value rise to some extent (Zhang and Huang, 2010). It can be observed from the chart
that in start of 1999 index value was nearby to 100 and it rose from this level to 800 by the end
of mentioned year. This mean that within a year index rise by 700%. It can be said that seven
times index value rise in comparison to base value of index within a year. This was historical
peak in value of Cyprus stock exchange index. But after reaching this peak point historical
downfall also observed in the Cyprus stock exchange index value. In start of 2000 index value
was 650 and by end of 2002 this value become confined to 350. This means that by -46% index
value decline during the mentioned time period. If we measure this fall from start of December
month of 1999 then it can be seen that index value fall by 65% during late 1999-2002. This was
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1 2 3 4 5 6
0
50
100
150
200
250
300
350
400
450
Column J
Illustration 7: Change in Cyprus stock exchange index value from July-December 2002

huge historical fall in index value of Cyprus stock exchange. This reflects that momentum comes
in start of 1999 which comes to end in December month of same year. After this momentum of
fall in index value comes in existence which remain continue even after 2002. Investors loose
heavy amount of money during this time period. Hence, it is very important for retail and giant
investors to understand trend in stock market. Only by doing this investor can rationally make
investment decisions.
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REFERENCES
Books and Journal
Edmans, A., 2011. Does the stock market fully value intangibles? Employee satisfaction and
equity prices. Journal of Financial Economics. 101(3). pp.621-640.
Fama, E. F. and French, K. R., 2012. Size, value, and momentum in international stock returns.
Journal of financial economics. 105(3). pp.457-472.
Goo, Y.J. and et.al., 2010. A study of the disposition effect for individual investors in the
Taiwan stock market. Emerging Markets Finance and Trade, 46(1), pp.108-119.
Vayanos, D. and Woolley, P., 2013. An institutional theory of momentum and reversal. Review
of Financial Studies. 26(5). pp.1087-1145.
Wu, Y., 2011. Momentum trading, mean reversal and overreaction in Chinese stock market.
Review of Quantitative Finance and Accounting. 37(3). pp.301-323.
Zhang, C. and Huang, L., 2010. A quantum model for the stock market. Physica A: Statistical
Mechanics and its Applications. 389(24). pp.5769-5775.
Online
Why Newton was wrong. 2011. [Online]. Available through: <
http://www.economist.com/node/17848665>. [Accessed on 1st June, 2016].
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