Effectiveness of the relative strength strategy over short and intermediate horizons : Evidence from the Nordic equity markets

Abstract

This master’s thesis studies the relative strength strategy in the Nordic stock markets by replicating the influential paper by Zhu, Duan and Tu (2019). Zhu et al. (2019) are the first to study the relative strength strategy in the US equity markets, and therefore this thesis aims to contribute to academic literature by testing the performance and robustness of the relative strength strategy in the Nordic markets by using data from the Danish, Finnish, Norwegian and Swedish stock markets between 1992–2021. The relative-strength measure proposed by Zhu et al. (2019) exploits both the short and intermediate-term past return information and thus it can be seen to share similar characteristics to the well-known short-term reversal and momentum strategies The average monthly returns of the relative strength strategy in the Nordics are calculated and further evaluated with a battery of robustness tests. The results indicate that the relative strength strategy does produce positive abnormal returns in the Nordic stock markets that behave more similarly to the momentum strategy rather than to the short-term reversal strategy. Robustness tests show that the relative strength does not perform as well in the Nordics as it does in the US. Even though the monthly average returns are positive and robust to different market conditions, alternative measures of past performance and the January-effect, the returns are not robust to Carhart’s (1997) four-factor model or Fama and French's (2018) six-factor model. Also, the returns diminish significantly after during the post-2000 period, suggesting that the strategy would not be viable in the Nordic stock markets.