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Momentum in Imperial Russia

Last Updated on 10 February, 2024 by Rejaul Karim

In the NBER Working Paper “Momentum in Imperial Russia” by William N. Goetzmann and Simon Huang, Imperial Russia’s 19th century equity market is examined to provide a unique historical perspective for evaluating leading theories of momentum within financial markets.

Prior to evidence of delegated management, this period allows for testing empirical predictions based on the overconfidence explanation, information-based theory, and institutional theory in relation to market composition and structure.

The researchers identify a momentum effect comparable in magnitude to modern markets and stronger during the post-1893 period after a regulatory change that made speculating on the St. Petersburg stock market more accessible to small investors.

This finding supports the overconfidence theory of momentum and offers valuable insights into how market composition and structure can impact the profitability of momentum strategies.

Abstract Of Paper

Some of the leading theories of momentum have different empirical predictions about its profitability conditional on market composition and structure. The overconfidence explanation provided by Daniel, Hirshleifer, and Subrahmanyam (1998), for example, predicts lower momentum profits in markets with more sophisticated investors. The information-based theory of Hong and Stein (1999) predicts lower momentum profits in markets with lower informational frictions. The institutional theory of Vayanos and Woolley (2013) predicts lower momentum profits in markets with less agency. In this paper, we use a dataset from a major 19th century equity market to test these predictions. Over this period, there was no evidence of delegated management in Imperial Russia. A regulatory change in 1893 made speculating on the St. Petersburg stock market more accessible to small investors. We find a momentum effect that is similar in magnitude to those in modern markets and stronger during the post-1893 period than during the pre-1893 period, consistent with the overconfidence theory of momentum.

Original paper – Download PDF

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Author

William N. Goetzmann
Yale School of Management – International Center for Finance; National Bureau of Economic Research (NBER)

Simon Huang
University of Massachusetts Amherst – Isenberg School of Management

Conclusion

In conclusion, “Momentum in Imperial Russia” by William N. Goetzmann and Simon Huang delivers an enlightening analysis of momentum strategies by leveraging the distinctive historical backdrop of 19th century Imperial Russia.

The research adeptly tests notable theories of momentum, such as the overconfidence explanation, information-based theory, and institutional theory, within the context of a market that operated without delegated management. Findings show a comparable momentum effect to that of modern markets, with an increase in strength after a pivotal regulatory change in 1893.

Thus, the study bolsters the overconfidence theory of momentum while emphasizing the critical role of market composition and structure in influencing the efficacy of momentum strategies. Ultimately, this research provides a significant contribution to financial literature, illuminating the nuances of momentum within a previously unexplored and unique historical setting.

Related Reading:

Trading Strategies Based on Past Returns – Evidence from Germany

Do the Size, Value, and Momentum Factors Drive Stock Returns in Emerging Markets?

FAQ

Q1: How does the paper test different theories of momentum in the context of Imperial Russia’s 19th-century equity market?

The paper tests the overconfidence explanation, information-based theory, and institutional theory of momentum by leveraging data from Imperial Russia’s 19th-century equity market. The absence of delegated management during this period allows for empirical testing of these theories based on market composition and structure.

Q2: What is the key empirical finding regarding momentum in Imperial Russia’s equity market?

The researchers identify a momentum effect in Imperial Russia’s equity market that is comparable in magnitude to modern markets. Importantly, the momentum effect becomes stronger after a regulatory change in 1893, which made speculating on the St. Petersburg stock market more accessible to small investors. This finding supports the overconfidence theory of momentum.

Q3: How does the study contribute to our understanding of momentum and its profitability in financial markets?

The study provides a unique historical perspective on momentum by examining Imperial Russia’s 19th-century equity market. By testing and confirming the overconfidence theory of momentum, the research highlights the impact of market composition and structure on the profitability of momentum strategies. The findings contribute valuable insights to the broader understanding of momentum in financial markets.

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