The relationship between financial distress risk and momentum anomaly in Tehran stock exchange

Subject Areas : Financial Knowledge of Securities Analysis

Hamidreza Vakilifard ¹ , Meysam Ahmadvand ² , Mohammadjavad Sadehvand ³

1 - Associate Professor of Accounting, Islamic Azad University, Science and Research Branch. Tehran, Iran.
2 - PhD Student of Financial Management, Allameh Tabatabaei University. Tehran, Iran.
3 - PhD Student of Financial Management, Islamic Azad University, Science and Research Branch. Tehran, Iran.

Received: 2016-10-04 Accepted : 2016-12-21 Published : 2018-06-22

Keywords: Financial distress risk, Momentum Anomaly, Market under-reaction, Tehran Stock Exchange,

Abstract :

This paper is to study the relationship between momentum effect (continuation of prior returns) and financial distress risk using data from companies listed on Tehran stock exchange during 31/01/1387-31/04/1393. In this research, financial distress risk was calculated by the second version of Altman Z-Score model. To describe momentum effect, by determining the formation period to be 6 months, and the holding period to be 3, 6, or 12 months, we firstly examined the profitability of short term (3/6), midterm (6/6), and long term (12/6) momentum strategies and found that during abovementioned time period, only midterm momentum strategy was profitable. Then, we showed that momentum anomaly was driven by market under-reaction to financial distress risk. In other words, it can be said that momentum is proxying for distress risk, and is largely subsumed by distress risk factor.

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